The U.S. Supreme Court’s Wayfair
ruling has opened the door for each state to subject online and other electronic sales made by out-of-state sellers to sales or use tax. Now, tech companies need to ensure they have the proper tools and procedures to charge and remit the correct tax in all required jurisdictions. Tech companies also need to understand the impact Wayfair
may have on their financial statements in order to determine what they need to track and report on a prospective basis.
Your company can use Wayfair
as an opportunity to modernize its tax function through a high-level review of current processes, while identifying areas where automation and analytics can help handle the additional new requirements.
About the Wayfair ruling
On June 21, 2018, the US Supreme Court issued a ruling
in South Dakota v. Wayfair, Inc., Overstock.com, Inc. and Newegg Inc
. (the “Wayfair ruling”). The Court essentially concluded that a state can tax sales made to in-state customers, even when the seller doesn’t have a physical presence
in the state.
This overturns historic Supreme Court precedents that allowed a state to tax sales only if the seller had a physical presence
in the state (often referred to as the “Quill
physical presence standard”).
What the ruling means for you
While states can
tax online and other electronic sales, many businesses are waiting to see how
each state and/or taxing jurisdiction will tax sales and when
they will start. These and other factors will determine how and when businesses have nexus in each state or taxing jurisdiction. When a business establishes nexus in a state or taxing jurisdiction, the business meets the minimum sales threshold or other requirements and must collect and pay the state or local jurisdiction’s sales or use tax.
Here are some common misconceptions that tech companies need to set aside:
Ways to prepare
- This ruling applies only to internet retailers.
- This ruling doesn't apply to me, since I don’t sell taxable products or services.
- I perform services for customers in just one state or taxing jurisdiction, so I need to be worried only about tax implications in the state or taxing jurisdiction where the services are performed.
- The economic nexus thresholds apply only to taxable sales.
- The nexus rules won’t apply to prior periods.
- I have treaty protections on my inbound sales.
- This ruling does not have an impact on my financial statements.
- This ruling will not result in additional compliance and administrative burdens.
Tech companies should act now to help prepare for the new tax laws related to the Wayfair
1. Assess the overall business Impact
At a high level, make sure you understand how this ruling will impact your customers, vendor relationships and overall business operations. Your company and tax team need to be ready to answer a host of questions, including:
2. Determine past and current nexus, and the new filing requirements
- How are you keeping track of sales in states where you’re currently not filing based upon physical presence?
- Are you tracking gross sales? Can you track gross sales? Can you track taxable sales?
- How are you tracking your number of transactions? Are you tracking transactions on a monthly, quarterly or annual basis? What does the “number of transactions” mean in each state — is it based on the number of license holders? Is an implementation, an ongoing license or a recurring annual update to a license a transaction?
- Can you track your “click-through nexus” (when your products are sold through a vendor or other party) and meet those reporting requirements?
- What are you doing for income tax purposes?
The new state tax impositions will mean a substantial increase in compliance requirements, including filing in additional states/jurisdictions or related entities filing in the same state. Also, be aware of “click-through nexus” standards when you make sales through a vendor, third-party platform or party. This can affect whether you meet a state/jurisdiction’s threshold of “minimum sales” to establish nexus and a compliance requirement.
Lastly, inbound goods from foreign sellers without a physical presence may be subject to compliance obligations and possible taxability, to the extent that states are willing to enforce the rules on these businesses.
Review your past activities and monitor current activities to determine nexus. This can be as simple as looking at revenue per state/jurisdiction, but it’s sometimes difficult to determine the location of the users for technology solutions.
may have a significant impact on your financial statements, so make sure to review your positions for both indirect and direct functions. You need to know where your sales are going — not just on the bill-to and ship-to basis, but also whether varying revenue streams or items are bundled or unbundled. If you have not previously filed in a taxing jurisdiction, you may not have considered those sales that could fall into a “gray” area and thus has not gone through the decision tree on whether these sales should be included in an ASC 450 accrual.
Implement a documented process now and continue utilizing that process every quarter or annual period to be prepared for future audits and for determining where you have nexus. Then you will be able to properly assess sales tax on your products and services to avoid paying taxes out-of-pocket that you could have charged your customers.
3. Determine the taxability of items and services…and Income
With more taxing jurisdictions at issue, you will have more tax determinations to make. Presentation on invoices may also be interpreted differently by states and jurisdictions.
affirms the taxing jurisdictions’ ability to use economic nexus standards for income tax. Even if jurisdictions do not retroactively charge sales taxes, jurisdictions may start enforcing income taxes. Wells Fargo (similar to the technology industry in that it typically does not sell tangible goods) adjusted its Q2 state income tax reserve by almost a half a billion dollars. Tech companies are generally not protected by Public Law 86-272 because they are not selling tangible property, so they need to keep track of how jurisdictions’ actions might impact their reserves.
4. Determine the most efficient structure
As you determine nexus for each jurisdiction, and what products and services are taxable or exempt, you also need to ask, What’s the most efficient structure to handle potential new obligations? Your current structure may now require filing of multiple returns to the same taxing jurisdictions.
More filings will ultimately result in more audits or multistate audits. More vendors will be requesting certificates for purchases that they historically did not tax due to a lack of physical presence. In this new nexus age, tech companies need to be prepared to provide resale certificates and high-tech certificates required in certain jurisdictions. The same goes for the sales side, where more of your customers will likely be providing similar certificates. Tech companies really need to be prepared to renew, monitor, retain and validate exemption certificates — and fortunately, there are a number of automated solutions that can help you do this.
5. Prepare to manage more documentation
Will your current team be able to handle a sudden influx of additional responsibilities? Even if you don't sell to the end user, economic nexus will cause a huge uptick in monitoring of sales and documentation gathering and retention. Exemption certificate retention and validation will require greater attention.
As exemption certificates, resale certificates and other documentation multiply, you need to determine whether your data repository meets your needs. If you are delivering a technology service to multiple states at the same time, you need to document that in your contracts, invoices and purchases. If you’re buying software or marketing materials that are being used in 30 states, make sure that sales tax is being applied to each of the jurisdictions in which the items are being used, rather than solely to the “ship-to” jurisdiction.
6. Automatically monitor sales tax paid to vendors
Does your team closely review sales tax paid to vendors and use allocations for applicable purchases such as software and marketing materials?
Companies are charging more tax in more jurisdictions than ever before. This requires a closer review by your accounts payable department to ensure that the charged sales tax is proper and determinations as to whether any allocations for multistate purchases such as software and marketing materials can be utilized.
Smaller companies with smaller tax teams will now be responsible for assessing tax in more jurisdictions. This increases the risk that small companies will incorrectly calculate their taxes — including the taxes they charge as vendors to larger companies. Vendors may be overly conservative because, if they overcharge sales tax, it’s not their money — it’s your money. Accordingly, you need automated systems that can review sales taxes, pay vendors and potentially accrue use tax.
7. Select and implement a sales tax system
Can your current sales tax system process scale, or do you need to consider new tools or procedures? This may seem like an overwhelming issue — there are complex and expensive systems, but there are also more straightforward ones that you can implement on the sales and purchase sides.
It’s best to talk with at least two or three system vendors to find the right fit for your team, your system and your enterprise resource planning (ERP) in the technology field — finding something that’s scalable and suits your business needs. You may want to start small and then ramp up, or start big and scale back.
As you can see, there are many issues to be considered with the new obligations created by the impact of the Wayfair
decision. While in some cases your company will be able to assess on its own, in others it would be best to talk to experienced professionals to ensure you have considered the different aspects and to have access to those with multiple experiences with these evolving issues.
National Tax Leader, Technology Industry Practice
+1 703 847 7595