FAQ: Wayfair’s Impact on Businesses that Sell Taxable Goods and ServicesBy James (Jay) M. Brower, Jr | March 4, 2019
On June 21, 2018, the U.S. Supreme Court overturned a longstanding court precedent that applied to the collection of sales tax from online and other remote retailers. In South Dakota v. Wayfair, Inc. et al, the Court replaced the “physical presence” rule with an economic nexus threshold for determining when states can impose a sales tax collection responsibility on out-of-state sellers of taxable goods and services.
James M. Brower, Jr., CPA, MST, Partner in Marks Paneth’s State and Local Tax practice answers some of the most common questions asked by business owners when considering the impact of Wayfair on their company’s state sales tax liabilities.
Q: For purposes of determining which state and local taxes my company has to pay, does “physical presence” still matter?
A: Yes, physical presence still matters. Even if you are below a state’s economic nexus threshold, if you have employees working there (including employees who telecommute, salespeople who visit existing or prospective customers, technicians who enter the state to repair/replace equipment, etc.) or own or lease property in the state, you are likely liable to collect that state’s sales tax and are also subject to its other business taxes.
Q: How far back can states go to collect sales tax from our business if we now have “economic nexus” with them?
A: If you now have “economic nexus” with one or more states based on their applicable thresholds but did not have physical presence within them in the past, the state(s) will only be able to assess and collect tax from the date that their economic nexus laws or regulations were enacted. For most states, this would be mid to late 2018 or early 2019. You will certainly need to register and start collecting sales taxes on a going-forward basis. If there is a significant liability for uncollected taxes, Marks Paneth LLP can assist you in negotiating a Voluntary Disclosure Agreement with the states in order to limit your exposure to penalties.
Q: Most, if not all, of what my company sells is sold by my customers or incorporated into products that they in turn sell. Since I have little to no retail sales, does the Wayfair decision affect my business?
A: Possibly, if not likely. The fact that your customers resell your products or incorporate them into products that they sell might mean that you won’t have to register to collect sales taxes in the states to which you ship product, even if you exceed that state’s economic threshold. However, you can still be held liable for a state’s sales tax if you do not receive and maintain “resale” or “exemption” certificates from your customers. These certificates are documents that your customers sign and provide to you to represent that they are eligible to purchase your products free of state sales tax.
Upon audit, the failure to have a properly executed resale or exemption certificate in your files can result in all sales made to customers who did not provide you with certificates subject to sales tax. Accordingly, if you haven’t already, you need to start contacting your customers and ask them to provide resale certificates (if the customer resells your product) or exemption certificates (if your customer is a tax-exempt entity, such as a utility, charity or governmental entity) in order to protect yourself in case of an audit. These certificates should be updated every few years. In the event that a customer refuses or otherwise does not provide you with a certificate, you should charge them sales tax in order to protect yourself.
Also, several states impose gross receipts business taxes on the seller, such as Ohio’s Commercial Activity Tax (CAT) and Washington’s Business and Occupations (B&O) tax. While the Wayfair decision dealt with a state’s sales tax, it seems rather obvious now that an out-of-state seller can also be liable for non-sales taxes in states where they have “substantial nexus.” Accordingly, your business might be liable for a state’s business tax.
Finally, most states impose a net income-based tax. While federal law protects businesses from state income taxes when the business sells only tangible personal property into the state that is delivered from a location outside of the state, businesses may still have to file tax returns and pay a minimum tax.
Q: I own/operate a service-based business. We don’t sell any physical products. Are we affected by the Wayfair decision?
A: Possibly. While most state sales taxes are imposed on the retail sale of goods, many states also tax services and, unfortunately, there is no uniformity among the states as to which services are taxable and which ones are not. Accordingly, it is possible that you may have to register to collect sales tax in one or more states where you do not have a physical presence if you exceed that state’s “substantial nexus” threshold.
Also, many states have enacted “economic nexus” or “factor nexus” rules for income taxes and other business taxes. States that employ “market-based” sourcing may require you to source your revenues (and therefore the incidence of taxation) to the state where your customers are, not the state where you actually perform some or all of the services.
Finally, if you are a business that operates an online platform (software as a service or SaaS), you need to know that many states impose sales tax on those types of services. Where you are providing a mixture of both taxable and non-taxable services, you need to properly segregate the charges or else the entire charge can be subject to sales tax.
Q: Our company sell products to customers all over the country. How can we determine which states we may need to start collecting sales tax in?
A: The best way to determine this is through a State and Local Tax Nexus Study, which can be conducted by the State and Local Tax (SALT) professionals at Marks Paneth. This will generally involve reviewing your sales by destination over the past 18-24 months, interviewing your staff to determine which states you may have physical presence in, and other analyses. With this information, our specialists can tell you which states you should be registered with for sales and other business taxes.
About James (Jay) M. Brower, Jr
Jay Brower, CPA, is a Partner of corporate and individual tax compliance and research services at Marks Paneth, LLP. He has more than 20 years of professional experience at the federal, state, and local levels. Mr. Brower's duties also include the development of tax planning and implementation strategies, as well as education and development of the firm's professionals. Mr. Brower provides tax planning and compliance services to clients in the manufacturing, commercial fishing, telecommunications, professional... READ MORE +