With the vast changes in sales tax requirements among states due to the impact of Wayfair, technology companies should consider how this will apply to them. The summary below discusses how this could impact businesses throughout the U.S. Some of the issues most applicable to the technology industry include:
- Services performed on behalf of customers in other states, even if no employees physically enter these states, as this could create economic nexus.
- Remote software and SaaS provided to customers/licensees in other states, as the value of the use in other states could trigger economic nexus.
- Understanding the complex taxability of IT services and software among all states rather than just the state(s) where there was a traditional physical presence.
- Collection of exemption/resale certificates from applicable customers in all states, as this should be evaluated for all states now, not just the states where the company has a physical presence.
- Implementation of a system to properly capture tax in all jurisdictions where sales tax may now apply.
- Increase headcount or potential outsourcing of sales tax compliance, due to increased volume of registrations and filings that come with expanded nexus footprint.
Background
In 2016, South Dakota passed a law stating that an out-of-state vendor with no physical presence in the state must register for South Dakota sales tax if the vendor has 200 transactions or more into the state or their annual sales into the state exceeds $100,000. In addition to passing the law, South Dakota also sued several large e-commerce vendors that they felt exceeded these thresholds, including Wayfair, Overstock.com, and Newegg. The issue ultimately landed in the U.S. Supreme Court (South Dakota v. Wayfair, Inc.).
In June 2018, the Supreme Court’s 5-4 decision in Wayfair ruled in favor of South Dakota. The ruling upheld the state’s requirement that certain retailers, with no physical presence in South Dakota, collect sales taxes from in-state customers and held that South Dakota’s law was not a burden on interstate commerce and was not overreaching.
What are other states doing?
With South Dakota prevailing in Wayfair, many other states have enacted similar economic nexus laws or regulations. The South Dakota statute sets a minimum threshold of $100,000 in sales or 200 or more separate transactions of tangible property, products transferred electronically, or services delivered within the state annually. Since the Wayfair decision, there has been a swift adoption of similar economic nexus laws in other states. For example, Massachusetts has enacted a $500,000 corporate income tax nexus regulation. But with more than 10,000 sales tax jurisdictions in the U.S., states are not the only places of where impact is felt. Philadelphia imposed a $100,000 threshold for the city business income and receipts tax. Likewise, Pennsylvania established nexus at $500,000 of gross receipts. Businesses must be aware of nexus on multiple levels.
What should taxpayers do now?
In light of Wayfair and the impact that this has on the way states administer sales and use tax, the following table summarizes some of the primary areas that should be evaluated.
| Area | Before Wayfair | After Wayfair |
|---|---|---|
| Nexus Studies | Focus on physical presence, including property, employees, and agents in each state. | Evaluate economic activity in each state, including sales and number of transactions. Even if under these thresholds, physical presence should be considered. |
| Exemption Certificates | At a minimum, collect certificates in states where there is a physical presence. | Consider collecting certificates in all jurisdictions. Even if below economic threshold for registration currently, with thresholds so low in most states, slight changes in sales can change future filing requirements. |
| Taxability Determinations | Focus on states where there is a filing requirement. | Evaluate taxability in all states due to lower threshold for registration and potential need to apply tax in additional states. |
| Registration Requirements | Based on physical presence and in some cases, type of business or sales made into each state. | Based on sales volume in many states, $100K in sales or 200 or more transactions in a year, for example. States may differ in how they define “sales” for purposes of meeting economic threshold—could be gross sales, retail sales, or taxable sales. |
| Risk and Exposure Analysis | Focus on physical presence footprint, taxable sales, and exemption documentation within this footprint. | Much more complex. Look at sales across the U.S., layering in each states economic threshold and effective dates while still considering physical presence. |
| Booking Reserves (ASC 450) | Does anything within risk and exposure rise to the level of probable and estimable? | With many more jurisdictions in play for most companies, much more likely that a liability could exist. |
| Purchase/Use Tax Activity | Vendors would charge tax if they were registered in a purchaser’s state (typically triggered by physical presence). | Expect more vendors to start collecting tax based on the expansion of their nexus footprint. Evaluate the need to extend exemption certificates or turn off use tax accruals. |
| Drop Shipments | In many states, drop shippers can accept out-of-state resale certificates from companies that don’t have nexus in their customer’s state. | With nexus expanding, higher likelihood that a company selling product has nexus in customer’s state and will not be able to extend an out-of-state certificate. Companies selling products through drop shippers may create a filing requirement in many additional states. |
| Impact on Mergers and Acquisitions | Identifying non-compliance in some jurisdictions during due diligence is typical, but usually limited to a few jurisdictions and can be immaterial. | Expect non-compliance to expand as states enact changes more rapidly than companies are able to react. When evaluating exposure, pre- and post-Wayfair periods should be analyzed separately if no physical presence exists. |
| Other Tax Filings | With some exceptions, most state taxes follow similar physical presence standards as sales tax. | If a company registers for sales tax due to economic nexus in a state, evaluate other state taxes to see if additional filings may be necessary. If nothing else, registering for sales tax will increase a state’s awareness of activity taking place within that state. |
If you have any questions or would like additional information about the decision and how it may affect your business, please contact your FORVIS advisor or a FORVIS State and Local Tax professional.