Qualitative SCOTUS Wayfair Insight
CohnReznick webinar clarifies challenges and concepts related to the Wayfair decision
In June 2018, the U.S. Supreme Court handed down a decision in the case of South Dakota v. Wayfair Inc. In that decision, the court overruled the long-standing “physical-presence” standard as a basis for imposing state sales tax that had been previously established in the historic case of Quill Corp. v. North Dakota. In Quill, the court had prohibited states from requiring online retailers (and other out-of-state businesses) to collect and remit sales tax if there was no physical presence in the form of brick-and-mortar buildings or employees within a state’s borders. Wayfair changes this.
Wayfair begs several questions and answers. Shortly after the decision, CohnReznick conducted a webinar where listeners weighed in on several Wayfair-related issues and questions. Below are some of the questions along with detailed answers.
Q: If we are unsure if we meet a states threshold for collecting sales tax, should we just assume we must and collect it? What are our choices?
A: The law varies by state, so the rules in each state should be reviewed. Generally, if a company believes it will meet the economic thresholds for sales tax collection during the relevant period, it should begin collecting sales tax if its products/services are subject to tax under the rules of that state. However, we recommend that prior to registering for sales tax, the company first verify that nexus has not been previously established by physical presence in each state. If physical presence has previously been established and prior exposure is material, we recommend applying for a voluntary disclosure agreement.
Q: How does Wayfair apply to local sales and use tax nexus?
A: It appears the decision is broad enough to also apply to local sales taxes. Both states and local jurisdictions are in the process of reviewing the decision. The filing requirements will ultimately depend on the jurisdiction specific tax rules adopted in the state with respect to local taxing jurisdictions.
Q: What is the time frame for the $100K or 200 transaction limits?
A: The time frame for the $100k or 200 transaction limits vary by state. Most states are basing nexus on a 12-month rolling period or on a calendar year. Generally, what services are taxable varies from state-to-state.
Q: If you make an interstate sale of services that is not online, is that going to be subject to reporting? For example, I provide bookkeeping and consulting services to clients in NYC, but my office is in Maine.
A: Again, the answer will vary by state. Services can be tricky when determining the situs (place) of the service for sales tax purposes. Many states will “source” the sale to the state in which the benefit of the service is received. The specific facts of the transaction should be reviewed carefully, as well as the laws of the relevant state. Further,
Q: How will the new ruling affect income tax for companies that provide a service rather than a product?
A: While the Quill physical presence has been the constitutional standard for sales tax nexus purposes, several states had distinguished that ruling for income tax purposes and adopted an economic presence standard for the income tax. Businesses that have economic activity in such states that are not currently filing income tax returns should now consider whether those filing positions should be revised post-Wayfair. They should also keep track of economic presence statutes adopted in additional states in response to Wayfair.
Q: Will the new GAAP revenue standard have any impact regarding when the states recognize these taxes?
A: The answer may vary by state. Many states require sales to be reported based on the traditional cash or accrual basis, however some states do allow for reporting to match the financial statements.
Q: What is internet retail or E-commerce?
A: Internet retail and E-commerce can be used interchangeably. E-commerce is defined as transactions such as buying or selling products and services conducted electronically. Internet retail, or electronic retailing is the sale of goods and services through the internet. Electronic retailing, or “E-tailing,” can include business-to-business (B2B) and business-to-consumer (B2C) sales of products and services, through subscriptions to website content, or through advertising. Therefore, if you are a brick-and-mortar outlet that has an online E-commerce channel, you also are making internet retail sales.
Q: Software licensing is not typically taxable as I understand it. Is that changing now that Wayfair is established?
A: In general, states treat software licensing as the sale of prewritten software. Most states tax the sale as a “sale of tangible personal property.” The overturning of Quill does not change the taxability of a product or service. However, it does change how a company determines if its required to collect and remit sales tax in a state.
Q: What is a marketplace “facilitator” and a marketplace “seller” as these relate to Wayfair?
A: An example of a marketplace facilitator is eBay. A marketplace facilitator generally engages in the following types of activities:
- Facilitates the sale of a marketplace seller’s product through a marketplace for payment.
- Engages, directly or indirectly, in any of the following with respect to bringing the buyer and seller together.
- Transmitting or otherwise communicating the offer or acceptance between the buyer and seller;
- Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together; and
- Providing a virtual currency that buyers can use to purchase products from the seller.
Marketplace sellers affected by Wayfair are different than facilitators. A good example would be a company or individual engaged in software development, or research and development processes related to any activities with respect to the seller’s products listed below:
- Payment processing services; fulfillment or storage services.
- Listing products for sale.
- Setting prices.
- Branding sales as those of the marketplace facilitator.
- Order taking.
- Advertising or promotion; providing customer service or accepting or assisting with returns or exchanges.
Q: Assuming Wayfair will be followed by most states, the burden to file tax returns and collect and remit sales tax will likely be significant for many companies. Has there been any dialogue about, say, Amazon, Walmart, or eBay being the collector and remitting agent?
A: There is talk about states requiring marketplace facilitators to collect and remit the tax. However, only Connecticut, Iowa and Minnesota currently have laws that will require market facilitators to collect and remit the tax. Alabama, Oklahoma, Pennsylvania and Washington will allow the facilitator to choose between reporting the sale information to the state, or collecting and remitting the tax. It is important to note that, if a company has sales from its own website or is not part of a marketplace platform, it still may need to collect and remit sales tax in the state. It will depend on the state's specific nexus thresholds.
Q: Does the new economic nexus rule affect cloud-computing services?
A: For the most part cloud-computing services will be included in calculating whether economic nexus exists.
Q: Would the new economic nexus rule affect non-traditional retailers and service providers?
A: The new economic nexus rule could also be applicable to the sale of services, such as information services, SAAS, computer software, repairs and maintenance to tangible personal and real property, etc.
Q: How will Wayfair affect non-profit organizations?
A: Tax-exempt organizations for the most part must comply with sales tax rules the same as for-profit businesses, unless specifically exempted by the laws of each state.
Q: Do economic nexus thresholds apply to internet sales only, or does it combine wholesale, retail, and internet sales to determine the economic nexus?
A: The answer will vary among states. Some states’ thresholds are based on "gross sales," while some states’ thresholds are based on "retail sales."
Q: If 2 (or more) separate legal entities operate under the same parent umbrella, should they combine their sales to determine economic nexus?
A: In general, nexus is determined on a separate-entity basis. However, some states have affiliate nexus rules that may require the determination to be made on a combined basis. It will depend on the specific state's rules. Affiliate nexus occurs when a remote seller and in-state related entity sell the same or a substantially similar line of products under the same or a similar business name, or the in-state facility is used to advertise, promote, manufacture, provide R&D, or facilitate sales for the out of state seller.
Don’t wait for states to notify you that they believe you are required to collect and remit sales tax from your customers. By then it may be too late to avoid costly penalties and a requirement to remit the sales tax that should have been collected from your customers.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.