by Robert V. Willeford
Stay-at-home orders as a result of COVID-19 have sparked an even greater increase in online purchases. More people are avoiding trips to the store and, instead, ordering online. The growth of online options has made it much easier to reach a potential customer on the other side of the country, or even the other side of the world, and online retailers are eager to sell everywhere a customer exists.
But with this comes its own set of complications. While it has been almost two years since the South Dakota vs. Wayfair decision, some retailers are still working to comply. The more sales retailers have in other states, the more likely they will have enough to require a filing responsibility in those states.
Ecommerce companies, even before COVID-19, have long enjoyed an advantage over their brick-and-mortar competitors, as online purchases were not taxed unless a consumer ordered from a company that operated in the same state. This changed on June 21, 2018, when the U.S. Supreme Court ruled in the South Dakota vs. Wayfair case, and understanding the implications is crucial. States may now force vendors to charge tax on purchases made from out-of-state buyers, even if the seller doesn’t have a physical presence in the state. Known as the “Wayfair decision,” the ruling allowed states the right to self-determine the sales threshold, or economic nexus, that would trigger sales tax collection. Many states did just that, as nearly every state now has an economic threshold.
The Wayfair decision has had far-reaching consequences for large corporations and small businesses alike. Sellers are now facing the burdensome task of ensuring they’re compliant—not an easy task when you consider there are nearly 10,000 sales jurisdictions in the United States.
Which companies have been impacted?
While ecommerce giants like Wayfair, Amazon, and Overstock were the obvious targets of the ruling, smaller businesses have also felt the effects. The threshold for what triggers tax collection is different from state to state, but essentially any business that makes a certain number of remote sales or reaches a specified threshold of sales revenue is required to collect taxes in the state those sales take place. With so many online sales taking place during the stay-at-home order issued by numerous state governors due to COVID-19, it is even more likely that retailers will reach those thresholds.
Aside from retailers, some of the businesses that have been affected include manufacturers and wholesalers, digital service providers, inbound companies located outside the U.S. but selling into the country, and private equity or portfolio companies. Companies that are involved in merger and acquisition transactions are also impacted as they must ensure that the company being acquired has abided by these new compliance rules.
How have companies been impacted?
For most sellers, the Wayfair decision has made remote transactions far more complicated. Because there isn’t a uniform standard for states to use to determine whether a business is subject to sales tax, sellers must spend additional time and resources to guarantee they are compliant with each state’s specific laws and policies. Because these policies are continuously changing, businesses must not only be vigilant and monitor their sales thresholds by state, they must also track the taxability of the products they are selling into said states.
According to a poll conducted by the American Catalog Mailers Association, the outcome of the Wayfair decision has been financially devastating to catalog, direct mail, ecommerce, and other remote sellers. Some retailers have had to pay up to $275,000 as an initial investment for sales tax collection software and consulting services, which doesn’t include the $500,000 in recurring expenses of sales tax collection. Overall, 56 percent of the poll respondents say they’ve experienced decreased sales as a direct result of the ruling.
What are the future implications of the Wayfair decision?
One of the major considerations of the Wayfair decision is: what’s next? The ruling has set the precedent that states have the right to force the collection of taxes. For now, it’s been sales/use taxes, but many businesses feel there is an implication that the next battle will be around states wanting to apply these new nexus rules to corporate income taxes, as well.
Some states like Pennsylvania and Hawaii are now beginning to apply income tax economic nexus rules—and as with state sales tax collection, the rules between the states vary greatly. With retailers already facing huge obstacles in meeting compliance requirements for state sales taxes, many fear that adding income taxes to the equation could result in profit losses that lead to bankruptcy and closings.
As mentioned earlier, another area of concern for retailers may be the additional nexus they may have pursuant to the COVID-19 virus. Those employees working from home in states the company did not have nexus may actually trigger physical nexus in those states. Depending on what that person does, they may lose Public Law 86-272 protection. This will potentially require registrations for income tax, sales tax, withholding tax and other taxes.
It also may require registration with that state’s Secretary of State to do business in that state. In response, states could make an exception due to COVID-19. For example, the District of Columbia recently announced they will not seek imposition of corporate franchise tax or unincorporated business franchise tax nexus solely on the basis of employees working from home during the COVID-19 public health crisis. Perhaps other taxing jurisdictions will follow.
It’s clear that the Wayfair decision is one element of a wider change in the dynamic between remote businesses and states. The only solution for addressing this evolving paradigm is for companies to be adequately informed about the ramifications and prepared to take the necessary steps to ensure current and future compliance.
Retailers need to know the states in which they meet the economic nexus filing requirements and consider a registration or, if past nexus existed, a voluntary disclosure agreement to prevent penalties and, potentially, interest. The Streamlined Sales and Use Tax Agreement makes it simpler for businesses to register across multiple states; however, each state will have its own requirements on the information and paperwork required to register and supplying these can be time-consuming and labor-intensive.
For most, the best option is to take a proactive approach. A tax advisor or consulting firm can help businesses determine the best way to go about establishing and maintaining compliance and help monitor any changes in state tax policies. Smaller businesses can benefit from consultation on whether or not the cost of compliance is worth the revenue they make in out-of-state transactions.
Robert J. Willeford, Jr. is the Director of State and Local Tax at Anders CPAs + Advisors, with over 20 years of multi-state sales and use tax experience. Along with his public accounting experience, Robert has worked in large, multi-state corporations and in the government sector as a tax auditor.