Post Wayfair – What Now? How to Navigate the New Sales Tax Climate

The initial chaos resulting from the U.S. Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) has settled, and taxpayers understand that states have authority to impose sales or use tax obligations on businesses that may not have a physical presence such as equipment, buildings or employees in the state, but merely have an economic presence (i.e., limit their activities in the state to making sales to customers). While physical presence still creates nexus, which the U.S. Constitution requires before a state may impose a duty to collect tax on an out-of-state business, most jurisdictions have already adopted an economic nexus standard, such as the Court approved “200 transactions or $100,000 of sales” threshold. States quickly took advantage of their new authority, with Florida and Missouri currently as the only states without an economic nexus standard.

What now? What does this mean for taxpayers? The points below illustrate the issues taxpayers should be thinking about in the post-Wayfair era.

• Do I have an increased sales tax exposure? Wayfair created potential exposures for every type of business that makes sales of products and services, particularly those who sell products or services over the internet. These businesses will find that their sales and use tax nexus footprint may be much broader than it was in the pre-Wayfair era. Taxpayers should examine their sales activities in each state and determine if any of the jurisdictions in which they make sales or provide services might assert that they have an obligation to collect sales or use tax.
• How do I stay compliant in light of the new sales and use tax landscape? With likely increases in sales and use tax obligations, taxpayers should re-evaluate their sales processes, sales and use tax collection systems, and the filing and reporting processes and determine if they have the steps in place to properly collect and remit sales and use tax. First, taxpayers may need to adjust their sales processes. For example, if a company makes sales for resale, it will need to collect the resale certificates from its customers up front. More taxing jurisdictions mean more resale certificate collections and more tracking (i.e., administrative burdens). Second, taxpayers will need to consider their sales and use tax collection mechanisms. Is sales and use tax collection software necessary? If so, which platform works best for the business and is it compatible with the enterprise resource planning (ERP) system and sales platform? Third, taxpayers will face increased sales and use tax filing obligations as a result of Wayfair. Sales and use tax filings can be due on monthly, quarterly, or annual bases, as opposed to income tax filings, which are due annually. Therefore, an efficient system should be in place. There are sales and use tax software applications available to help taxpayers manage sales and use tax collection in various states and localities.
• Who bears the burden of unpaid liabilities? Sales and use tax liabilities are generally joint and several, and states will impose the liability on whoever they find first—the vendor or the purchaser. If a business did not collect sales or use tax from its customers, but had an obligation to do so, the business will either have to go back to their customers and collect, or they will have to pay the state out-of-pocket for the sales or use tax. Businesses generally opt for the latter, which can adversely impact their bottom line.
• What actions are the states taking? Increased sales tax obligations have resulted in a rise in state nexus inquiries and sales and use tax audits. Taxpayers need to be ready to respond appropriately to minimize exposures to the extent possible.
• Other items to consider: There are opportunities to mitigate the resulting sales or use tax liabilities. Most states have a Voluntary Disclosure Program that allows taxpayers to come forward (usually anonymously), present their liability and willingness to comply, and the state may waive penalties. As part of the process, most states offer a limited look-back period for which sales or use tax liabilities will be assessed. Additionally, some states have amnesty programs under which they will waive penalties and/or interest on uncollected tax within a specific time period. Taxpayers can also appeal audit decisions, which may lead to a settlement. Taxpayers should be proactive and determine any unpaid sales tax liability before any states come knocking on their door. Booking this liability on taxpayers’ financials under ASC 450 will help ease the burden of any liabilities that arise. Additionally, taxpayers on either end of a merger or acquisition should uncover any sales tax liability as part of their due diligence process and discuss whether the buyer or seller will bear the liability in the negotiations.

How Can Andersen Help?

Andersen’s Indirect Tax team has the tools and expertise necessary to help businesses navigate the new sales and use tax frontier and address the issues discussed above in the post-Wayfair era. Andersen’s service offerings include nexus determinations, risk and liability exposure quantifications, mitigation tactics (including customer outreach and Voluntary Disclosure Agreements), consulting on and implementation of sales and use tax software, and ongoing sales and use tax compliance. Andersen is also familiar with the changing landscape of how states are applying sales and use tax laws at the audit level and can assist taxpayers with responding to state notices, represent taxpayers in state audits, and most importantly, help avoid state conflict through efficient planning.