The Wayfair impact on the tax function

Young businesswoman reading paperThe South Dakota v. Wayfair ruling, represents one of the biggest changes in state and local tax law in 25 years. It caps a lengthy period in which digital sales have transformed the business landscape, and businesses, states and tax professionals are still absorbing the implications of the ruling. One thing is clear: The Wayfair decision has shifted priorities within tax departments and has forced CFOs and tax executives to evaluate their tax function for future readiness. As Kelli Knoble, Grant Thornton’s Global Indirect Tax leader, notes, “We are beginning to see the C-suite ask more questions about risk management, process and strategic planning across all areas of the tax function. It is clear that proactive leaders are addressing this head-on.”

Given Wayfair, what strategies should the C-suite and tax executives consider as they prepare their tax function for the future?

Understand your risk Historically, tax departments have focused the bulk of their efforts and resources on their federal tax, as U.S. federal income tax rates were among the highest in the world. Tax reform changed that by making rates far more competitive on a global scale. Prior to the lower federal rates and pre-Wayfair, tax department resources primarily focused on the federal and state income tax side.

With Wayfair and federal tax reform, the value proposition of tax departments has dramatically changed. Wayfair accelerates this fundamental shift in tax function priorities from concentrating on federal, state and local income taxes to an even broader focus on sales and use and property taxes (transactional taxes). CFOs seeking to drive tax-efficient structures and value need to reconsider long-held biases and embrace the potential above-the-line risk that transactional taxes can bring to an organization.

“CFOs in particular need to fully understand what’s happened: that income tax is still a significant piece of the tax function, but from a risk standpoint, sales tax, property tax and other above-the-line taxes should be top of mind,” said Grant Thornton’s Mark Arrigo, national managing partner of State and Local Tax Services. “But are companies ready? In my experience, the answer is no, as they have not made the strategic mindset shift yet.”

Assess your current tax function “If I’m a CFO, and someone tells me 80% of my state tax liability is between property tax and sales tax, and that area has only 20% of my resources because of a previous concentration on federal and state income tax, how does that make sense?” Arrigo said, adding that many companies will need to shift their strategic focus to the new tax landscape created by Wayfair.

This new landscape will require organizations to allocate resources to match the risk and liability. This will require new thinking around the types and skills of future resources, and it will allow organizations to match limited resources to what is now both a true risk and liability.

As an example of the complexity, Arrigo pointed out that “with Wayfair, if a company is not handling sales tax or its documentation requirements properly, four years from now when it’s audited, that becomes its own liability and a financial hit. There’s no reason for organizations to take that risk, especially now that Wayfair has magnified this issue.”

Some organizations are taking a risk, for example, by having accounts payable clerks make major decisions on tax when they may not have the skills, especially with the new law. “When you think that sales tax becomes an above-the-line item when not handled properly -- a significant amount, one of the largest pieces of state tax that organizations have to effectively collect and remit for the states – then if you have an error, you’ve turned it from a pass-through responsibility to your own risk.” In this example, an organization may want to automate the tax decision process with technology that is set up to make more consistent decisions or add a level of review by a resource solely focused on state sales and use tax matters.

Rethink resources and approach In a future where much greater movement and risk will be concentrated in above-the-line taxes, the skills that you need may not necessarily be the ones that you have, affecting hiring decisions, training and even re-skilling of existing staff.

“You have to have the right resources,” Arrigo said. “When you have activities in 50 states but only one person managing sales tax, there is no way that person can be on top of all the details and understand the complexity of each jurisdiction.” The complexity requires a broader skill in state taxes, and most likely a well thought out investment in technology that can facilitate risk management and strategic value. Not all tax departments have that expertise in-house, so partnering with a third party to design a technology solution is another consideration – and investment – for any CFO.

The new rules require a “shift in mindset,” said Arrigo. “A more balanced split between [resources for] income and transactional tax would be a good short-term goal to pursue."

4 cornerstones of the corporate tax function The reorientation of the tax department has been a long time coming, and there are no easy answers to what mix of skills, strategy and technologies you will need. Start with these considerations as you think through your future tax function.

  1. Know your exposure above and below the line to manage risk across your entire tax portfolio.
  2. Assess the talent in your organization in light of the shifting demands of the tax landscape.
  3. Harness technology to help you manage not only the demands of collection, remittance and compliance, but also the analytics and tools that can enhance planning.
  4. Retool today for tomorrow’s business so that your organization has a strategy to expand the business and grow profitability in the coming years. Your tax function has to be ready to contribute.

Contacts Mark ArrigoMark Arrigo
National Managing Partner and Practice Leader, State and Local Tax Services
T: +1 678 515 2320

Kelli KnobleKelli Knoble
Global and Indirect Tax Leader
T: +1 704 632 6804