Now that the Supreme Court has ruled
in favor of South Dakota and overturned Quill, many businesses are asking the question “What does the Wayfair ruling mean for me?” Grant Thornton has tapped its national tax policy team to help answer commonly asked questions. Read the answers below and stay up-to-date with our latest Wayfair
webinars and thought leadership.
1. How do I determine which states I need to file in first?
Since the South Dakota v. Wayfair
decision was issued on June 21, 2018, states have been moving to impose economic nexus standards through statutes and regulations, but with varying thresholds and effective dates for sellers. Knowing what the thresholds and effective dates are in each jurisdiction is critical in determining where you need to file and when.
First, you need to determine those states in which you have met the nexus requirements for filing. After you have identified those states in which you meet the requisite thresholds, you will need to determine the effective date of the laws, which will dictate when you need to register and begin filing. For those states that have effective dates that have already gone into effect, you may need to consider the potential exposure and remediation options for periods in which the nexus thresholds were met but returns were not filed. It is also important to note that you may need to examine the taxability and sourcing of the products and/or services provided as the sales tax treatment may vary by state.
2. When do I need to start registering and filing?
Bear in mind that you only need to register, collect and remit sales tax in which economic nexus has been created as defined by that state. In South Dakota v. Wayfair
, that threshold was defined as exceeding $100,000 in sales to South Dakota customers, or at least 200 transactions to South Dakota customers for the current or prior calendar year. It should be noted that while some states have followed the South Dakota economic nexus legislation as a template for their own provisions, others have created their own standards, so that when viewed in the aggregate, the economic nexus thresholds and effective dates applied by the states are currently inconsistent and non-uniform.
3. What considerations do I need to address related to increased documentation and exemption certificate requirements?
Maintaining accurate documentation is key for sellers, as documentation is used to substantiate exempt transactions, particularly in the event of an audit. For accurate, cost-efficient sales tax collection, you need to do three things: (1) make a correct tax calculation at the time of sale; (2) report your sales and complete your filing on time; and (3) maintain proper documentation on any sales made either to exempt entities or for an exempt use.
As a best practice, it is recommended that you begin collecting and maintaining the required exemption certificate documentation for all your exempt sales, as it is expected that substantially all states that impose a sales tax will ultimately enact some form of economic nexus thresholds.
4. What are the implications for manufacturers selling raw material as opposed to finished goods?
Nearly all manufacturers will be affected by the Wayfair
decision. Even those manufacturers who don’t sell to end-users may be required to register for sales tax collection in states where the economic nexus thresholds are met. States require certain documentation to be maintained by sellers, such as properly completed resale or customer-level exemption certificates, in order to substantiate an exemption. Without proper documentation, the transaction becomes a taxable transaction.
5. Does the Wayfair ruling apply to any software-as-a-service (SaaS) purchases?
Businesses selling SaaS, cloud-based, and other digital goods or services that historically had a small nexus footprint due to the nature of their business may now be subject to additional sales and use tax collection and remittance requirements if the economic nexus thresholds are met and the state imposes sales tax on the sale of such items.
The sourcing of cloud-based and other digital goods historically has been a challenge for both states and sellers. The lack of physical delivery makes the location of delivery unclear, and states may determine the source of transactions in an inconsistent, non-uniform manner. For example, states may base the tax on where the seller resides; the address of the purchaser stated in the receipt or contract; or on the locations of both of the server and user(s), which may be in multiple states, thereby obliging the seller to render taxes in all of those jurisdictions. In any case, it is critical to capture and maintain complete sales information used to make sourcing determinations in case of an audit.
6. Are there any income tax implications on the horizon?
specifically addressed whether a state can require an out-of-state seller to collect sales tax when the seller lacks an in-state physical presence, there are some states that have had economic nexus laws on their books for years that apply to corporate income and franchise taxes. To the extent that companies relied on historical sales tax physical presence nexus standards in determining their income and franchise tax filing footprint, there may be tax exposures in states where it met the economic nexus threshold for income and franchise tax purposes, but is not filing.
Additionally, while states have not yet provided significant guidance on income and franchise tax implications since the Wayfair
decision was issued, states may feel emboldened due to the Wayfair
ruling for sales tax to consider--and potentially enact-- economic nexus legislation applicable to state income and franchise taxes.
7. What are the implications of the Wayfair ruling on foreign sellers?
Businesses with no U.S. permanent establishment that sell into the U.S. may nevertheless have U.S. sales or use tax collection and remittance obligations. Foreign sellers will have similar challenges and/or processes to implement as their U.S.-based counterparts. Specifically, a non-U.S. company will need to consider its nexus footprint based on the new standards, the sourcing of its sales by state, the taxability of the products and services sold, and its exemption certificate maintenance and collection processes.
Additionally, the legal entity making the sale needs to have systems in place to be able to accurately compute and collect sales tax at the time of the customer sale, ensure that it has proper documentation for its remittance activity, and have procedures in place to file sales tax returns. Before registering in any state, a foreign company needs to consider whether there are any exposures for prior sales to customers in that state and how this exposure might be mitigated.
8. What are the various effective dates and thresholds?
Tracking this legislation continues to be a challenge due to the volume and frequency of changes for the states. Grant Thornton maintains a summary by state of the sales tax economic nexus thresholds and effective dates that can be obtained from your Grant Thornton contact.
9. Has anything changed for marketplace facilitators?
Even before the Wayfair
decision was issued, a number of states already required marketplace facilitators like Amazon, eBay, or Etsy to collect and remit taxes on transactions that occurred within the marketplace, even where the facilitator was not a seller or purchaser on such transactions. As with the economic nexus rules imposed on remote sellers, the economic nexus rules imposed on marketplace facilitators vary by state and will need to be examined to determine the potential sales tax registration and filing requirements.
10. What state actions can be expected in the months ahead?
It is not surprising that states are enacting and proposing sales tax economic nexus rules for remote sellers. It is likely that substantially all states that impose a sales tax economic nexus rules for remote sellers, and anticipate that substantially all states that impose a sales tax will enact some form of economic nexus legislation or issue guidance within the next several months. Additionally, there has been an uptick in states with sales tax economic nexus rules in place that are proactively mailing correspondence to unregistered businesses informing them of the new economic nexus rules and the potential registration and filing requirements.
In the 2019 state legislative sessions set to begin early next year, some states are expected to consider and potentially enact legislation to expand the sales tax base through product taxability changes, specifically around SaaS and digital goods. Therefore, it is important to continue to monitor changes on the taxability of products as well.
Principal, State and Local Tax Services
+1 202 521 1504
Mark R. Arrigo
National Managing Partner and Practice Leader, State and Local Tax Services
+1 678 515 2320
Partner, State and Local Tax, National Wayfair Leader
+1 813 204 5101