With the vast changes in sales tax requirements among states due to the impact of Wayfair, private equity firms should consider how this will apply to them. The summary below discusses how this could impact businesses throughout the U.S. Some of the issues most applicable to private equity include:
- Understanding how expanded nexus rules will impact the companies in which private equity firms hold stake, as it can impact each industry differently.
- Ensuring that the private equity firm’s companies are addressing Wayfair issues timely to avoid any surprises during transactions.
- When evaluating potential exposure, understanding the rules and timing of economic nexus enforcement of each state to ensure pre- and post-economic nexus activity is properly captured. The implementation dates and thresholds vary by state.
- With sales tax, the acquiring company typically inherits the liability of the purchased company, even if it is an asset transaction. Therefore, it is important to focus on potential sales tax exposure in all circumstances.
In 2016, South Dakota passed a law stating that an out-of-state vendor with no physical presence in the state mustregister for South Dakota sales tax if the vendor has 200 transactions or more into the state or their annual salesinto the state exceeds $100,000. In addition to passing the law, South Dakota also sued several large e-commercevendors that they felt exceeded these thresholds, including Wayfair, Overstock.com and Newegg. The issue ultimatelylanded in the U.S. Supreme Court ( South Dakota v. Wayfair, Inc.).
In June 2018, the Supreme Court’s 5-4 decision in Wayfair ruled in favor of South Dakota. The ruling upheld thestate’s requirement that certain retailers, with no physical presence in South Dakota, collect sales taxes fromin-state customers and held that South Dakota’s law was not a burden on interstate commerce and was not overreaching.
What are other states doing?
With South Dakota prevailing in Wayfair, many other states have enacted similar economic nexus laws orregulations. The South Dakota statute sets a minimum threshold of $100,000 in sales or 200 or more separatetransactions of tangible property, products transferred electronically, or services delivered within the stateannually. Since the Wayfair decision, there has been a swift adoption of similar economic nexus laws inother states. To date, more than 35 states have enacted or announced some form of economic nexus, most with effectivedates ranging between October, 2018 and January, 2019.
A summary of state economic nexus adoption dates and thresholds can be found on our website at dhg.com/wayfair.
What should taxpayers do now?
In light of Wayfair and the impact that this will cause to the way states administer sales and use tax, thefollowing table summarizes some of the primary areas that should be evaluated by these changes.
| Area || Before Wayfair || After Wayfair |
| Nexus Studies || Focus on physical presence, including property, employees and agents in each state || Evaluate economic activity in each state, including sales and number of transactions. Even if under these thresholds, physical presence should be considered. |
| Exemption Certificates || At a minimum, collect certificates in states where there is a physical presence. || Consider collecting certificates in all jurisdictions. Even if below economic threshold for registration currently, with thresholds so low in most states, slight changes in sales can change future filing requirements. |
| Taxability Determinations || Focus on states where there is a filing requirement || Evaluate taxability in all states due to lower threshold for registration and potential need to apply tax in additional states. |
| Registration Requirements ||Based on physical presence and in some cases, type of business or sales made into each state. ||Based on sales volume in many states, $100K in sales or 200 or more transactions in a year, for example. States may differ in how they define “sales” for purposes of meeting economic threshold – could be gross sales, retail sales or taxable sales. |
|Risk and Exposure Analysis ||Focus on physical presence footprint, taxable sales and exemption documentation within this footprint. ||Much more complex. Look at sales across the U.S., layering in each states economic threshold and effective dates while still considering physical presence. |
|Booking Reserves (ASC 450) ||Does anything within risk and exposure rise to the level of probable and estimable? ||With many more jurisdictions in play for most companies, much more likely that a liability could exist. |
|Purchase / Use Tax Activity ||Vendors would charge tax if they were registered in a purchaser’s state (typically triggered by physical presence). ||Expect more vendors to start collecting tax based on the expansion of their nexus footprint. Evaluate the need to extend exemption certificates or turn off use tax accruals. |
|Drop Shipments ||In many states, drop shippers can accept out-of-state resale certificates from companies that don’t have nexus in their customer’s state. ||With nexus expanding, higher likelihood that a company selling product has nexus in customer’s state and will not be able to extend an out-of-state certificate. Companies selling products through drop shippers may create a filing requirement in many additional states. |
|Impact on Mergers and Acquisitions ||Identifying non-compliance in some jurisdictions during due diligence is typical, but usually limited to a few jurisdictions and can be immaterial. ||Expect non-compliance to expand as states enact changes more rapidly than companies are able to react. When evaluating exposure, pre- and post-Wayfair periods should be analyzed separately if no physical presence exists. |
|Other Tax Filings ||With some exceptions, most state taxes follow similar physical presence standards as sales tax. ||If a company registers for sales tax due to economic nexus in a state, evaluate other state taxes to see if additional filings may be necessary. If nothing else, registering for sales tax will increase a state’s awareness of activity taking place within that state. |
Wayfair has changed the landscape of nexus standards for sales tax, with most states already announcing prospectiveadoption of economic nexus standards. Expanded compliance requirements will demand more resources, a potential needfor a more sophisticated sales tax system and perhaps greater outsourcing of compliance.
We will continue to provide updates and perspective on the impact of this landmark case as states begin to implementchanges. If you have any questions or would like additional information about the decision and how it may affect yourbusiness, please contact your DHG advisor or a DHG State and Local Tax Professional.