Compliance in the Post-Wayfair World: What’s Next?

In arguably the most important sales tax case in the past 25 years, the U.S. Supreme Court announced its highly anticipated decision in South Dakota v. Wayfair, Inc. In summary, the Wayfair decision eliminated the historical “physical presence” standard and effectively put in place an “economic nexus” standard based on the amount of business a company does in a given jurisdiction.

The impact of this decision not only creates an administrative burden for companies that sell directly to end-users, but also creates an administrative burden and filing obligation for companies that sell to customers that may have valid exemption certificates. This means that a sales tax registration and filing obligation would still be required, even if most or all sales are exempt.

The Court’s decision in Wayfair will impact businesses across many industries that sell products or services in multiple states. Not only the brick and mortar and online retail businesses, but also manufacturing, distribution, construction, software, healthcare, professional services and many other companies.

Response from other states


States other than South Dakota may now seek to collect sales tax from remote sellers by conforming their nexus standards to adopt an economic nexus standard. A group of states, anticipating a favorable outcome on the Wayfair case, created an economic nexus standard with forthcoming effective dates.

Still other states may seek to assert that their existing nexus standard encompasses the holding in Wayfair and seek to impose them accordingly. Further, it is possible that some states will provide a grace period for companies to come into compliance.

What companies will need to consider


Companies will now have to evaluate the impact of Wayfair on their business operations. Specific issues to consider:

NEXUS STUDIES

  • Nexus studies based on operational facts and with agreed upon assumptions about safe harbors and economic nexus standards
  • Local jurisdiction nexus issues

PROCESS / SYSTEMS

  • Sales tax systems and process analysis:
    • Scalability of systems
    • Evaluation of internal compliance headcount
    • Need for jurisdictional product tax determinations
    • Jurisdictional customer taxability determinations
  • More robust exemption/resale certificate management capabilities
  • Outsourcing of some or all of the expanded sales tax compliance responsibilities:
    • Understanding outsourcing pricing
    • Understanding outsourcing data requirements
    • Understanding outsourcing management issues
  • Invoice formatting issues to conform with sales tax laws
  • Cash to accrual issues:
    • Smaller taxpayers who are on the cash method of accounting who now have to make accrual-based sales tax remittances
    • Transition issues
    • Creating reconciliation records

AUDIT

  • Now that sales tax exposure is expanded, assistance with internal controls;
  • ASC 450 reserves:
    • How to establish financial reserves for periods between economic nexus establishment and registration and compliance conformity
      • Tax, interest and penalty amounts
      • Disclosure
      • Measurement

REGISTRATIONS

  • Registration issues, how soon, after statutory nexus is established can a taxpayer get registered such that they can they collect and remit
  • Possible VDAs if, prior to registrations, latent liabilities need to be addressed
    • Cost effectiveness; and
    • Related non-sales tax – tax issues
  • The need for filing zero returns – business and tax issues

SOFTWARE

  • Vetting software providers with expanded capabilities

DROP SHIPMENTS

  • Determine which party is responsible for collecting and remitting sales tax – the retailer, the supplier or the consumer
  • Determine what nexus standards apply in which states
  • Communication between parties about who/when to collect sales tax
  • Develop transaction scenarios within each state to guide the application of sales tax compliance

Next Steps


We will continue to provide updates and perspective on the impact of this landmark case as the states begin to implement changes. If you have any questions or would like additional information about the decision and how it may affect your business, please contact your tax advisor, or the authors listed below.

DHG Contacts


Bill Poad
Senior Manager, State & Local Tax
tax@dhg.com

Julie Bragg
Sales Tax Practice Leader,
Tennessee
tax@dhg.com

Tommy Varnell
Sales Tax Practice Leader,
Atlanta
tax@dhg.com