It’s been a bit more than two years since the Supreme Court sent shockwaves through the online seller community. A high profile case in the era of ecommerce, South Dakota v. Wayfair, Inc., represented a significant change in the way sales tax nexus worked.
In turn, the past two years have been incredibly tumultuous as companies worked to adjust to new rules put forth. Unlike certain accounting standards that are finally coming into practice after six years of commentary, this was a seemingly instant change, and one that left many companies scrambling to understand and adapt.
Background: South Dakota v. Wayfair, Inc.
On June 21, 2018, the court overturned Quill Corp. v. North Dakota, a 1992 case that imposed the physical presence test on states seeking to collect sales taxes from remote retailers shipping to residents in the state. This case, South Dakota v. Wayfair, Inc., changed everything about the way you collect and plan for sales tax.
In the months following Wayfair, nearly every state began to formalize documents regarding economic nexus. Often defining this as $100,000 or 200 transactions over the prior 12 months, states can now collect from you whether or not you have a presence in this state.
Quick Changes, Unexpected Challenges
Wayfair represented a significant and fundamental change in state and local taxation, and companies received just under six months to adjust; most states put economic nexus provisions into effect on January 2019. Now, as simple as it sounds—pass on the sales tax as you would any other retailer—this required a lot of effort on behalf of companies: Completing a state-by-state analysis to determine if and how much tax they need to add on.
But this wasn’t all. According to Malcolm Ellerbe, CPA and Partner at Armanino, “An equally troublesome fact pattern among taxpayers who have done the Wayfair threshold analysis is that they begin filing in the states where they meet the Wayfair sales thresholds, only to discover that they were soliciting sales or traveling to these states in prior years; thereby establishing a pre-Wayfair physical presence collection obligation, and an additional accrual pursuant to ASC 450 (Contingencies). Liabilities can be minimized through voluntary disclosure agreements with the states if addressed before Wayfair-compliant registration and filing in those states.”
Two Years Later, Issues Remain
While noted that states and large retailers seemed to have an easy time with compliance, smaller retailers—especially those who didn’t have the infrastructure—are still working to put themselves up to date.
Businesses Still Adapting
From a government perspective, the dust has settled—a new revenue stream and a few printed resources to enforce legislation that was written with the expectation that Quill would be overturned.
But from a business perspective, the dust is still quite a ways from being settled. So says Scott Peterson, vice president of U.S. Tax Policy and Government Relations at Avalara.
“There still remain a tremendous number of businesses that may have heard of Wayfair but have not evaluated how it impacts their business. They have been too busy selling to understand the full impact and ramifications of Wayfair, or they trust their accountant or bookkeeper to let them know when there’s an issue.”
Five Concerns Caused by Varying State Legislation Initiatives
According to the overview provided in Accounting Today, “complications generated by the differing responses of the states in passing Wayfair legislation have generated numerous issues. […] there is a wide variety among the states on a number of issues, which makes tracking economic nexus very difficult.”
The article went on to note five ways differing legislation makes this challenging:
- Previous calendar year or 12-month period? While most states define this as $100,000 or 200 transactions over the past calendar year, others went for the 12 months prior to implementation.
- Is there a grace period for [state]? When do we have to start collecting? Once you reach the threshold, some states are silent on when you must register and begin to collect/remit, which suggests it must be immediate and presents obvious compliance difficulties if sales are made continuously.
- Are exempt, resale, or non-taxable services included? What sales count toward the threshold? State rules vary regarding whether a business is required to count sales for resale, non-taxable services, and/or exempt sales — for example, sales to a nonprofit or governmental agency.
- Do we combine sales from related companies? Several states — including Virginia and California — require certain related companies to aggregate their sales to determine if they have exceeded the state’s threshold.
- How do we plan for local home rule rules? In states with home rule local jurisdictions, nexus standards may differ. For example, the City of Boulder, Colorado, still uses a physical presence standard for nexus.
The changes brought forth by Wayfair may have left you scrambling to update your processes, analyze your transactions, and understand how to calculate sales taxes for at least 48 different jurisdictions. How did you fare? Especially with COVID-19 causing more ecommerce than ever, you may have triggered the nexus considerations unexpectedly already.
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