While speaking at a Texas Society of CPAs’ event, I shared my view that the United States Supreme Court decision on Wayfair, giving states the power to reach across state lines and force remote businesses to register for and collect and remit sales and use taxes even if they have no physical contact with the state, would be the most consequential and damaging tax event for US manufacturers and other businesses in the past thirty years. From the time of that decision in the summer of 2018 to the present, states have passed varying legislation to exercise this new power and impose their taxing schemes on businesses large and small even when those businesses never had an employee in the state, never had inventory in the state, never visited a customer, etc. Businesses are receiving more and more tax notices, nexus questionnaires, and other inquiries from remote states as the states expand sales tax and use tax audit and enforcement activities. The court decision allows for remote states to impose tax collection requirements on businesses that have over $100,000 of revenue or 200 sales into their state over a twelve month period.
It may be comforting to note that in the midst of the massive economic crisis associated with COVID 19, most states passed various forms of COVID relief including extensions of tax due dates and opportunities to defer payments. However, given the magnitude of the tax burden associated with Wayfair, you would think that a significant part of the states’ relief packages associated with COVID 19 would include giving more time for remote businesses to figure out how to collect taxes in other states. Unfortunately, very little or no COVID relief is being given to companies impacted by Wayfair.
Why is the Wayfair Decision Overreaching?
I suspect the reason is because the many laws passed are guaranteed to not impact or harm any of the particular state’s constituents. By definition, the “economic nexus” theory embraced by the court only impacts companies whose employees and representatives do not live and never visit the respective state. Small business owners and their employees do not live in the states passing these cumbersome laws and will never have the ability to vote for or against the legislators and tax administrators imposing these laws. States will put companies out of business because of Wayfair, but only companies that do not have any employees living in their state. No matter how harmful the law, no vote can be cast against the legislator by those that are harmed and the manufacturing jobs that are lost will be lost in other states. This is why manufacturers are getting more notices.
How Do You Approach Wayfair Compliance?
With this in mind, Wayfair is not going away. Small and middle market companies can immediately do the following simple, initial steps to estimate and mitigate the potential sales tax harm:
· Identify all states where physical presence has been established by an employee, visiting sales agent, inventory stored by fulfillment centers, or other contact. If sales tax is not being collected in that state, identify the date that the contact was established for the potential “open period”. Multiply total revenue in that state for the open period by an average tax rate of 8% to estimate the potential tax burden (prior to penalties and interest).
· For any remaining states where there is revenue, track the revenue number over 12 months and determine if it exceeds $100,000. If so, estimate an open period of two years and multiply the revenue for that period by 8%.
· Determine whether an outside party such as a potential investor or buyer will be evaluating the financial statements. If so, they will likely conduct the above steps to identify contingent liabilities. Obtain guidance from your tax advisor on how to respond to these inquiries.
· If in the service business, identify whether the applicable remote states tax these services. For all sales, evaluate the customer base to determine the likelihood of obtaining resale or exemption certificates from the customers.
· Consider Voluntary Disclosure Agreements with states which can reduce the “open period” and result in waiver or reduction of penalties and interest.
· Speak to your tax advisor about the potential necessity to register for sales tax in these states, tax engine software options to populate billings with proper rates, and other potential steps to address the sales and use tax burden.
Remember, sales tax is supposed to be paid by the customer. For most states, the only way a seller ends up paying the tax out of pocket is when they should have collected and they didn’t. Remote states will be evaluating your sales, and they are increasing their audit and enforcement functions. We all hope COVID will go away, but I know this sales tax problem will not.