The State and Local Tax Landscape More Than Five and a Half Years Post-Wayfair – Where are We Now?
As anyone who follows state and local tax (SALT) matters knows, the United States Supreme Court’s decision in favor of South Dakota in June of 2018 in the Wayfair case was the biggest thing to happen in the SALT world in decades. The decision fundamentally changed the sales/use tax nexus and compliance landscape (for a previous BNN article on this matter, see here), and its impacts continue to reverberate.
Given that the Court’s decision was released more than five and a half years ago, one might think that this is now a settled area of the law, and one that most companies have come to terms with and dealt with. But that is far from true, as outlined in more detail below.
Current Status
While it is now clear that physical presence is not necessary to create sales/use tax nexus, many companies still struggle to understand the impact of Wayfair; businesses also struggle to monitor sales and transactions counts by jurisdiction as needed in order to determine when thresholds have been breached. Companies are also grappling with sales/use tax compliance (with both how and where to file and the costs of compliance), and with potential income/franchise and other tax implications.
The good news is that each of the forty-five states that imposes a sales/use tax has issued guidance. However, states continue to refine their tests as time passes, with a number repealing or reducing the importance of the transaction-based prongs.
Local tax compliance remains challenging in some states as well. Colorado, Louisiana, and others can be difficult to navigate, as can Alaska, which has some local taxes despite not having a state-level general sales/use tax. Local tax compliance can be time-consuming as businesses attempt to understand nexus rules, potential taxability differences, how and where to file returns, and other matters.
Remote workers and shifting nexus footprints post-pandemic may impact sales/use tax obligations as well. As businesses continue to compete to find the best workers, many have now looked far beyond the states where they have a physical presence to find talent, but often they have not fully considered the sales/use tax (or other) implications of doing so.
State and local taxing authorities also continue to expand the application of post-Wayfair standards to business income taxes. For example, Hawaii, Massachusetts, Pennsylvania (also, Philadelphia at the local level), Texas, and, most recently, New Jersey, all now have rules in the income tax realm. These rules can be confusing, particularly as businesses and many tax preparers struggle to understand how they apply and how they may differ from other economic nexus or bright-line presence rules for determining when a filing obligation may exist.
Finally, this is an especially challenging area for non-U.S. based companies who may be navigating a non-value added tax (VAT) transaction tax regime for the first time. Once inbound companies determine when and where they have a taxable presence, there may be additional complexities encountered as they seek to register and remit their taxes.
What Should You Do?
It is critically important to understand the sales/use tax profile of your business, not only in terms of sales to customers or clients, but also in terms of self-assessment of use tax, which is a commonly audited area. Given the potential tax obligations, and accompanying penalties and interest that may be involved, if you have not already addressed the impact of Wayfair or thought about sales/use tax matters more generally, the time to act is now.
If a business is not compliant with trustee taxes such as sales/use taxes and payroll taxes, there can be implications for its owners. Businesses who have audited financial statements may also have non-income tax reserve requirements for these tax types. Additionally, sales/use tax matters will come up during due diligence for any potential sale of a business, and sometimes when new financing or investors are being sought; it is not uncommon for these matters to result in issues that can impact a transaction or lead to escrows or purchase price adjustments.
Regardless of what has been done in the past or where your business may be headed in the future, it is a best practice to stay on top of tax obligations and to best position a company for future growth.
If you would like to discuss sales/use taxes or any other state and local tax matters in more detail, please contact Leanne Scott or your BNN advisor at 800.244-7444.
BNN’s SALT team works with clients across industries on state, local, multi-state, and sales/use tax matters. We can help you assess whether any prior period exposure exists, quantify any such exposure, and then work with you and your team to come up with a plan to mitigate it, when and where possible. We can also help you to understand the taxability of your products and services on a nationwide basis, any exemptions that may apply.
We have extensive experience with sales/use tax notices and audits throughout the country and are happy to provide assistance either behind the scenes or directly interfacing with taxing authorities.
Learn more about our SALT practice and get in touch with our team!
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
