The Wayfair Decision and the Impact on Not-for-Profit Organizations
On June 21, 2018, the United States Supreme Court decided in favor of the state of South Dakota in the case of South Dakota v. Wayfair, Inc, 585 U.S. (2018). This ruling overturned its prior holdings in Quill Corp v. North Dakota, 504 U.S. 298 (1992), which had been a longstanding precedent for determining whether an out-of-state seller was required to collect sales tax. The Wayfair case authorized the use of an “economic nexus” standard for sales tax collection, which has far reaching implications for retailers, including not-for-profit organizations.
Prior to Wayfair, the test for whether a remote seller had an obligation to collect sales tax on its sales to in-state customers was whether that seller had a physical presence in the state. This standard was established by the U.S. Supreme Court (SCOTUS) in Quill Corp v North Dakota, 504 U.S. 298 (1992). The Court created this bright-line rule requiring physical presence to ensure that the constitutional requirements of Due Process clause were met, i.e. that states could not unduly burden interstate commerce by imposing a collection duty on retailers without a sufficient connection to those states. Some examples of physical presence include the existence of a brick and mortar store or office, or the seller’s employees delivering goods or performing services in the state. Without this physical presence, the seller would NOT be required to collect and remit sales tax on purchases made by customers in that state.
In Wayfair, the Court ruled that the physical presence rule of Quill was unsound and incorrect; it held that South Dakota’s statute requiring remote sellers to collect and remit sales tax when certain sales and transaction thresholds were met satisfied the Commerce Clause. No longer must a company have a physical presence in the state to be required to collect and remit sales taxes; rather, an economic presence in the state could suffice, given certain criteria are met. Many states have subsequently adopted South Dakota’s economic nexus provision, which requires retailers with over $100,000 in sales or 200 or more separate transactions in the state during the prior or current year to register and collect sales tax. However, the exact threshold requirements often vary from state-to-state. Additionally, some states only consider “retail sales,” while others count all sales (including exempt sales) towards the thresholds. For most retailers, this new nexus standard will increase the number of states in which it has sales tax nexus, and thus its overall compliance burden.
A not-for-profit organization that sells to out-of-state customers must now determine whether those states have adopted economic nexus statutes for sales tax, and whether the organization meets each threshold. A not-for-profit should also assess its sales activity to determine which of its goods and services are taxable in these jurisdictions. Not-for-profits must now manage an increasing compliance burden by implementing procedures. A special consideration is needed for states with existing economic nexus laws that may seek to enforce these laws.
These are some other key considerations for not-for-profits in a post Wayfair world:
1. Not-for-profits must reevaluate the various states’ nexus standards in which they collect and remit taxes currently to determine the impact of these taxes on their ASC 450 reserve for indirect taxes. ASC 450 (formally known as Financial Accounting Standards (FAS) 5) refers to the accounting pronouncement that is the primary authoritative accounting document to provide guidance on proper accounting treatment of non-income tax contingencies. Even though not-for-profits are exempt from income taxes, it is still important to understand that there is a potential for state taxes, which could impact an organization’s financial statements.
2. Tax exempt organizations should determine whether they have nexus in states with economic nexus rules, and if so, examine the taxability of their products sold in those states. The issue here is that every state has different rules for the items it will tax. The gray areas are various state definitions of teleservices, internet- and cloud-based transactions.
3. To comply with the new sales tax laws, exempt organization may need to file in more states and consider automation solutions as tools to meet the increased volume of compliance work. It is important to note here that most states have now tied their reporting requirements to a specific dollar threshold or to a specific number of transactions. Many states have chosen $100,000 in sales or 200 transactions to trigger economic nexus, but this varies by state.
4. Tax exemption documentation – One of the common misconceptions within the tax-exempt world is that if an organization has its tax-exempt status, it is tax exempt within the states as well. To receive an exemption on a state level for sales and use tax, the seller must have an exemption certificate on file from the exempt customer. Sellers should ensure that exemption certificates are collected from customers in all states where the seller has sales tax nexus. Further, with the increased registrations in new states, an assessment needs to be made as to specific exemptions by state for such organizations and whether there exists an application for exemption with a systematic renewal registration in place. Lastly, and certainly a very important consideration, is the respective unrelated business taxable income (UBTI) exposure for the organization by state.
5. Nonprofits should be looking at the implications of Wayfair from two sides – the sales side and the purchasing side.
a. From the purchasing side- organizations should alert their accounts payable department and take a close look at all their invoices to see if sales tax is being charged as an out-of-state vendor. As mentioned previously, it is possible that the organization may need to supply their exemption certificate to more vendors.
b. From the sales side - specific organizations like universities, as well as other educational institutes and publishers, should pay special attention to how these rules affect online training and possibly even online courses. Additionally, nonprofits that sell non-exempt tangible personal property should be aware that they do not need to have a physical presence (brick-and-mortar building) in a state to trigger sales and use tax liability. Organizations should be aware that many states have exemptions to their sales tax filing requirements.
6. Exempt organizations considering this new ruling may need to contemplate, for the first time, or revisit again their multi-state charitable registrations. Although not a sales tax liability consideration, the legal analysis is similar in that a state by state determination needs to be made as to activity in each state, the applicability of certain thresholds, registration requirements, and continuing compliance. The threshold for charitable solicitation registration requirements is typically lower than sales tax triggers, but both are equally important evaluations even more paramount considering the ruling in Wayfair.
For more information about the Wayfair decision and the impact on not-for-profits, please view our recent webinar on demand here, or contact Lori Rothe Yokobosky, CPA, Senior Manager at 973.403.6940 or at LoriRothe.Yokobosky@cohnreznick.com.
On-Demand: Not-for-Profit Industry Governance & Financial Management Webinar Series