We would like to alert you to a significant state and local tax development that will likely impact your future sales and use tax compliance and could potentially have a financial statement impact.
We would like to alert you to a significant state and local tax development that will likely impact your future sales and use tax compliance and could potentially have a financial statement impact. How this development impacts your business should be analyzed without delay.
This summer, on June 21, 2018, the U.S. Supreme Court (“Court”) issued its opinion in South Dakota v. Wayfair; a landmark sales and use tax nexus case that has implications for all businesses (small through large and across all industry types) that sell their products or services across state lines (“remote sellers”).
The Court held that it is clear that the Commerce Clause of the U.S. Constitution requires a remote seller to have “substantial nexus” with a state before the state can require a seller to collect and remit sales and use taxes. Before the Wayfair decision, under a precedent affirmed in a 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota, the Court held that this nexus depended on whether the seller had a physical presence in the state. That is, without substantial physical nexus in a state, a state could not legally compel a remote seller to register and collect its sales tax.
However, 26 years later, the Court has now changed its position. In Wayfair, the Court reanalyzed what “substantial nexus” may encompass and ruled that, in today’s world, a state can require a remote seller to collect tax on sales to customers in that state, so long as the remote seller has significant “economic nexus” in the state – even though the seller lacks an in-state physical presence. The Court indicated that under certain circumstances, an economic or virtual presence can create substantial nexus subjecting a remote seller to register, collect tax and file sales and use tax returns in a state and that physical presence should not be the sole measurement of substantial nexus.
In anticipation, or as a result of this decision, to date, over 30 states have passed “economic nexus” laws similar to South Dakota’s. Under South Dakota’s law, in addition to physical presence nexus, a remote seller has sales tax collection nexus (“economic nexus”) with South Dakota if the seller, in the current or previous year, had sales of goods and/or services delivered into the state exceeding $100,000 or sold goods and/or services for delivery into the state in 200 or more separate transactions (regardless of the amount). Four states with similar economic nexus laws expected businesses to comply with the Wayfair decision for sales that are made into their state on or after July 1, 2018. Other states that have economic nexus statutes have generally settled on an October 1, 2018 or January 1, 2019 effective date in order to allow some time for businesses to comply.
We expect that all states that impose a sales tax will eventually enact some form of economic nexus law that mirrors South Dakota’s sales and transaction threshold regime. With that law on the books, state taxation departments will undoubtedly aggressively seek out non-compliant sellers and enforce their sales and use tax nexus statutes to the fullest extent—assessing uncollected tax, interest and penalties from their effective dates.
If you are selling products and/or services across the country, the Wayfair decision will likely affect your company. The most immediate impact will be on sellers that sell taxable products and/or services to end users (e.g., internet sellers; retailers of consumer products; software providers; sellers of digital goods; service providers, etc.). In addition, sellers that sell products or services for resale or on an exempt basis may also be impacted by the decision (e.g., manufacturers that sell to distributors (on a resale basis); sellers of “Exemption Certificate” products; sellers to nonprofit organizations). Under economic nexus rules, these sellers will be required to charge, collect and remit sales taxes on the sales of their taxable products/services or may be required to collect exemption certificates from customers, even though they have no physical connection to the state.
In addition to sales tax collection requirements, a large number of states, led by Colorado, enacted complex and burdensome use tax notice and reporting requirements for remote sellers. Under these laws, remote sellers must provide information to customers about their potential use tax liability obligations and report transaction data to the state tax department. A company that doesn’t have physical presence or exceed the economic nexus tax collection thresholds in a state could be subject to these requirements. Noncompliance from year-to-year can result in an aggregation of penalties which can multiply significantly.
From a financial statement perspective, noncompliance with sales tax collection and use tax notice and reporting rules could result in a financial statement impact. Generally, sellers are liable for uncollected sales and use tax and penalties associated with noncompliance of the notice and reporting rules. As a result, if your company is not fully compliant, accrued liabilities and footnote disclosure on the company’s financial statements pursuant to ASC 450 and ASC 405, Loss Contingencies and Liabilities, respectively, may be required at year end. These liabilities could be material and could potentially affect the company’s net worth, financial ratios, loan covenants and other financial measures.
blumshapiro is monitoring the rapid developments that are occurring since the Wayfair decision. On September 12, 2018, Tony Switajewski, State and Local Tax Partner, held a webinar on the implications of the Wayfair decision, developments since the decision was issued, potential U.S. Congress intervention, and recommend action steps that you should take to comply with the labyrinth of laws that are spreading throughout the country. Download the webinar to learn more details about this important tax case and the impact that it may have on your business.
Now is the time to be proactive in addressing your sales and use tax obligations and we ask that you contact your blumshapiro audit or tax engagement partner to discuss how the Wayfair decision and the Notice and Reporting requirements will impact your business and potentially the company’s financial statements.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.