The 2018 U.S. Supreme court ruling in Wayfair gave rapid rise to new sales tax obligations for online sellers. How did we get here and what every business, and by extension, business tax provider, should be doing to reduce risk.
Prior to Wayfair, Quill Corp. v. North Dakota (Quill) was the pre-eminent decision. This 1992 ruling stated that a business had to have a “substantial” physical presence within a state to be required to collect and remit taxes.
June 2019 marked the one-year anniversary of the U.S. Supreme court decision in South Dakota v. Wayfair, Inc. (Wayfair), the seminal ruling that allows states to require merchants to collect sales tax where they previously had no obligation to do so. The rule treats a virtual storefront the same as a physical storefront.
Over the years, the term substantial was diluted and eventually eviscerated down to as little as a one-day presence in some jurisdictions. Businesses that had employees, staff, contractors or affiliates doing business within a state for a single day could be subject to sales tax obligations within the state.
The way Americans buy goods and services has changed dramatically since 1992. No longer do consumers routinely run errands in search of a product. Instead, online shopping has become the go-to vendor of convenience for more people. The ability to see the volume of items available combined with fast shipping and greater security around online transactions has changed consumer behavior.
These two developments created an opening for Wayfair. While the physical presence tests still apply, Wayfair dramatically expands the number of businesses subject to sales and use tax obligations.
In addition, Wayfair set an arbitrary trip wire in South Dakota for when sales and use tax collections are required at $100,000 in sales into the state or 200 transactions. States can choose a dollar and/or transaction threshold in varying amounts, with some states going higher and lower than these Court-ordained thresholds.
States moved aggressively to adopt their own Wayfair thresholds and start collecting taxes on out-of-state sellers. In 2018, only 15 states had Wayfair laws. As of August 2019, all but two of the 45 states and Washington, D.C. that have statewide sales tax policies have implemented a Wayfair-like law. Only five states do not collect state-level sales tax: New Hampshire, Oregon, Montana, Alaska and Delaware, collectively referred to as the N.O.M.A.D. states.
Uneven enforcement
States implementing Wayfair rules and rates vary in effective dates, transaction thresholds, revenue thresholds and more, making enforcement of Wayfair rules uneven and confusing.
Most governments now charged with enforcing new Wayfair laws and rules are overwhelmed by input from businesses and are scrambling to establish a process around the rules. Government responses are delayed. Already some states are starting to request legal changes to eliminate the transaction count and maintain only a pure economic trip wire in varying amounts.
Reducing risk
The rules and processes across the more than 10,000 taxing jurisdictions in the U.S. aren’t clear. Practitioners must dig deeper into laws, rules and regulations to interpret risk and reduce exposure in sales and use tax. This is an opportunity for CPA firms to value-add fees from the premium level consulting services necessary to appreciate the nuances in sales and use tax from jurisdiction to jurisdiction.
In California, for example, the Wayfair law went into effect April 1, 2019. California is state collected, but local authorities don’t just piggyback on the state. Instead, each local jurisdiction can have separate standards and enforcement behind the over 2,000 rates in California alone. Automation is essential for both in-state and out-of-state businesses to monitor sales activity in each district, prepare to collect and remit all applicable taxes once the threshold is tripped on the very next transaction.
Colorado ranks as one of the worst states in the nation for sales and use tax. Colorado has over 71 home rule cities and counties, each with their own licensing, rules and rates. The state collects in roughly 300 cities and 300 counties. Wayfair in Colorado addresses state law but doesn’t apply to these home rule cities, who have been sending notices to out-of-state sellers requiring them to register. We have yet to see whether a home rule cities are able to enforce so review closely to advocate on your client’s behalf before registering a business where it doesn’t need to be registered. If all cities in Colorado required a sales tax license it would cost businesses in excess of $20,000 per annum to maintain such licenses.
Although Colorado initially set an effective date for Wayfair implementation of Dec. 1, 2018, the Department of Revenue granted businesses a grace period prior to enforcement, first through March 31, and subsequently to May 31, 2019. It took heavy lifting to get systems and the state filing requirements set up for compliance, and that heavy lifting continues as businesses scramble to meet new destination sourcing requirements.
No help from Congress
Lawmakers have been largely silent on the issue of sales and use tax. Congress failed to act in the first 25 years following Quill and is unlikely to act now on standardizing a federal approach to sales and use taxes. The nation’s lawmakers haven’t been able to come to a consensus on how to proceed and there are obstacles to mandating what state government does in this area.
The Supreme court’s ruling is likely to stand for some time. In acting, the justices acknowledged that the way we do business has changed. And, states have opportunities to capitalize on those changes with an increase in revenues.
Other considerations
As business has changed, so too has technology. What was once a manual process can now be automated. Businesses do not have to manage 10,000+ rates and rules to manage their risk. They can use an automated solution to make compliance easier.
But, interpreting the laws, rules and regulations is not something that can be automated. Therein lies the opportunity for business consulting. A number of areas come to mind, including:
- Reporting requirements. States with reporting requirements are still applicable until the company meets economic nexus thresholds or voluntary remittance (DMA v. Brohl U.S. Supreme Court case). Fortunately, many states have begun to remove these laws.
- Responsible party requirements. When registering to collect sales tax, individuals with proper authority or owners from the business must sign as a responsible party similar to payroll. Sales tax is a fiduciary tax, which means a business is collecting the government’s money and remitting it back to the government. A director, officer or others within an organization will need to put their neck on the line because a person within the entity must be responsible for this fiduciary duty. If tasks aren’t done properly, a business owner could be responsible for fraud. Sales tax obligations go with the entity; these obligations don’t go away if a company reincorporates, goes bankrupt or sells. The exposure is still there.
- Resale certificates. In the past, resale certificate might have been received only from the state where a business is headquartered. Now, with the movement to state of receipt, resale certificates in multiple states are likely to be required when sales are made to customers that are outside the headquarter state.
- Zero tax due returns. Even if you owe no money, it is better to register and file zero-tax due returns rather than not filing at all. Filing triggers a statute of limitations that limits look back exposure for unpaid taxes. If the government doesn’t want the return, they will notify a company, which should keep that notification in their proverbial back pocket to use in the event of an audit. Never assume you are safe. State governments have the power to enforce their laws and proving no nexus is often more work than a mere filing is worth.
Roadmap to compliance
Avoiding sales tax obligations isn’t cheaper than compliance and creates exposure that can be hard to pinpoint. So, help clients prepare to comply by starting with a streamlined nexus study. This helps you and your client understand revenue generation by state and how the business makes their money.
A nexus review also makes it easier to see relative risk across the country and determine the requirements to meet. Focus first on larger states where a company has more business going on. This might include highly populous states such as California, Florida, Illinois, New York and Texas.
Also, review the company’s process of controls, how sales orders are generated and put through the compliance process. Tap the sales team to understand how markets are made to more fully understand the way a sale is generated, and the necessary documentation required to flow through accounting and have sales help accounting and finance team manage risk and compliance.
Start to gather information for filing the right forms, including gross revenue and the number of transactions in states where sales are remote. Then create a plan to register, collect and remit, either via a marketplace or with a hosted or cloud solution.
Create a culture of compliance from sales team to accounting; it’s a company wide effort to manage multistate duties. No company should be eating a customer’s tax due to improper documentation, or not properly taxing a transaction at the time of invoice.
For businesses that have failed to do the right thing, consider the need for voluntary disclosure in states with effective dates that have already passed. Every state in America has VDA opportunities, except New Mexico, which offers a payback plan with a limited lookback, allowing businesses to reduce taxes, interest and penalties.
Texas has the best VDA program in country. In the Lone Star state, providers work directly with a person who has authority to create a workaround without getting caught up in the clerical system. The savings in back taxes and non-compliance costs from a VDA can easily be 10-times the amount a business pays a provider to get the agreement done.
What’s next
Wayfair is everywhere. Calculating sales tax is now a critical business process. More education is needed in this area to fully understand the idiosyncrasies in state and local tax.
State enforcement actions are likely to accelerate once states catch-up with all the new registrants. Every state will do something different so businesses must manage their own processes and liabilities, whether they are a marketplace provider or not. And, get ahead of the issues by familiarizing themselves with the issues and commit to continuing efforts to comply in this ever-changing landscape.
TaxOps works with CPAs/accountants, firms and sales tax automation solutions to help ensure your clients don’t leave you as a result of Wayfair. Reach out to Judy Vorndran at jvorndran@taxops.com.
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Judy Vorndran can be reached at jvorndran@taxops.com.
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