The 2018 South Dakota v. Wayfair ruling is reshaping the business landscape, forcing companies to consider its long-term effects. Wayfair’s case enabled cities and states to pass economic nexus laws that require out-of-state sellers to collect and remit taxes on local residents’ sales, and it permitted these jurisdictions to implement marketplace facilitator laws necessitating that eCommerce platforms collect and remit taxes on third-party merchants’ sales.
As of Sept. 23, 43 states had adopted economic nexus laws, and five more states began enforcing such policies on Oct. 1. An additional 12 states have added or amended marketplace facilitator laws, and even more states are slated to implement remote seller tax laws in the next few years.
American businesses had more tax minimizing options prior to the ruling, as retailers selling all across the country were taxed on their physical presences. States’ definitions vary, so companies could formerly reduce their exposures by basing their operations in locations with minimal tax rates and avoiding activities in other states that would trigger those jurisdictions’ particular definitions of what counts as a “physical presence.” That might mean not hiring contractors or employees in some states or declining to attend trade shows, open storefronts and store inventory in others.
New remote seller laws hinder sales tax avoidance, and states are using the Wayfair ruling to apply additional tax forms to these sellers. Businesses must therefore re-adjust to comply and avoid penalties in this new world of ongoing tax policy changes.
More than sales taxes
Economic nexus and market facilitator laws have pushed sellers to learn how individual states tax discrete product categories. Some do not tax groceries or clothing, for example, while others tax groceries at lower rates or only tax clothing if prices exceed certain thresholds, in the way that New York taxes only clothes priced at $110 or more.
Those are not the only new taxes facing remote sellers, and the Wayfair ruling may force businesses to reassess far more than just their digital sales. The Supreme Court decision also appears to enable states to require businesses to file income taxes for revenue shares generated there. The Massachusetts legislature has proposed a regulation that would obligate remote sellers above a certain sales volume to file, and Pennsylvania has already issued a similar demand. Merchants in San Francisco that surpass a certain threshold of gross receipts will face mandatory payroll expense taxes, and Texas is among the states to hit remote sellers with a franchise tax. Businesses therefore must pay attention to sales tax rates where they sell, as well as all kinds of local tax rates.
Unexpected tax obligations
Sellers that respond to economic nexus laws by registering with DORs may discover they owe more taxes than expected because those that thought they were only remote sellers may legally qualify as having physical presences. Arizona regards businesses as having physical presences if they store product inventory there — such as products held in fulfillment centers owned and operated by Amazon — or if representatives are present in the state for more than two days each year. Texas’ “physical presence” definition could obligate businesses that take orders or sales during an in-state convention or trade show to file taxes, even if a business only attended a single, one-day event in a given year.
Accounting specialists recommend that businesses carefully research any unpaid tax obligations before registering with the local DOR so that they can use states’ voluntary disclosure programs. States may choose to forgive fees and interest for businesses that make voluntary disclosures rather than simply wait and see if the states find out about their outstanding obligations. Businesses interested in mergers must also address unpaid back taxes or risk them complicating and delaying agreement closings.
Merchants may struggle with the new tax landscape, as a recent survey of technology companies’ chief financial officers found that 68 percent expressed high or moderate worry regarding tax changes in 2019 and that 10 percent of that worry stems from the Wayfair ruling. Many uncertain businesses have not taken proactive steps, waiting to act until tax authorities contact them over their obligations — a problematic approach.
U.S.-based entities are not the only ones reconsidering responsibilities and strategies after the Wayfair ruling. International sellers without permanent American physical presences that reach U.S. consumers online are typically exempt from federal taxes, but they must comply with localities’ new sales and use tax laws. These transactions make up a significant space, as 40 percent of Amazon’s top sellers are based in China — a figure that rose from 26 percent in 2017.
Tax advisors have had to explain this new environment to their overseas clients, and reports suggest that there have not been significant issues with overseas retailer noncompliance despite some initial confusion and reluctance. Large European eTailers, for instance, are used to coping with the EU’s somewhat comparable VATs and so appear to be adjusting more readily.
Many online sellers worldwide were — and continue to be — surprised by the South Dakota v. Wayfair ruling’s impacts. Businesses face new obligations not only for sales taxes but also income taxes, franchise taxes and more. Marketplaces have not finished adjusting to Wayfair, either, as changes continue to roll out.
Arizona, for example, is phasing down its SMB exemption threshold to only affect those selling less than $100,000 in 2021. Florida — one of only two states with sales taxes but no remote seller tax policies — is considering a bill that would introduce economic nexus and marketplace facilitator policies. Businesses are carefully studying their changing tax obligations as states and cities continue to explore the possibilities the Wayfair ruling has unleashed.