State and local tax experts continue to wrestle with the complexities of the 2018 South Dakota v. Wayfair U.S. Supreme Court decision. Part of that effort is finding a way to explain how the decision affects the companies they work or the clients they serve. Ilya Lipin, managing director of state and local tax with BDO USA LLP, and Jennifer Weidler Karpchuk, a state and local tax partner with Cozen O'Connor, review the key points of the case and how to communicate them. Both experts coauthored “Pennsylvania Online Sales Tax Law Changes after Wayfair” and this topic will be covered in greater length at PICPA’s CFOs and Controllers Conference on March 19, 2020, in King of Prussia.
By: Jim DeLuccia, Manager, Learning Content
The U.S. Supreme Court's 2018 South Dakota v. Wayfair decision is affecting how states are levying sales tax on online purchases. Of course, Pennsylvania CPAs must ensure that their clients or the businesses they work for, are following these regulations. On top of that, they also must find a way to communicate these complexities to their clients. Or if they're in the corporate sphere, employers and customers. Joining me in person today to help sort this out is Ilya Lipin, managing director of state and local tax with BDO USA, LLP, and Jennifer Weidler Karpchuk, *senior counsel with Chamberlain Hrdlicka.
Jen and Ilya, thanks so much for coming into the PICPA offices today and welcome to the program.
Thanks for having us.
What are a few changes in the law that have occurred after the Wayfair ruling that are affecting Pennsylvania sales tax?
Sure. Over the past year there have been a mix of statutory changes and bulletins that have come out from the Department of Revenue. I think first maybe it makes sense to look back at what had happened pre-Wayfair in Pennsylvania.
Beginning effective March of 2018, marketplace facilitators, vendors and referrers that had more than $10,000 in sales into Pennsylvania were required to either elect to collect the sales tax or abide by certain notice and reporting requirements. So then fast forward to June of that same year, June of 2018, we have the Wayfair decision coming out.
January of 2019, we have the Pennsylvania Department of Revenue responding to Wayfair and they issued a bulletin where they took the position that Wayfair enabled them to subject taxpayers with a $100,000 or more of gross sales into Pennsylvania to economic nexus laws and to collection requirements and no longer allowing for the option to instead abide by notification and reporting requirements.
In June of 2019, we have the legislature codifying the Department of Revenue's position. They amended what the definition of maintaining a place of business in this Commonwealth was, to include vendors having $100,000 or more in gross sales of tangible personal property or services during the preceding 12 months. That's all on the sales and use tax side.
In September of 2019, we also have the Pennsylvania Department of Revenue again coming out with a bulletin addressing corporate net income tax and how Wayfair had woven its way into that tax as well. The Department of Revenue asserted that there was a rebuttable presumption that out of state taxpayers with $500,000 or more of gross receipts sourced to Pennsylvania would have nexus for purposes of the state's corporate net income tax.
Additionally, you have Philadelphia who in January-February of 2019, had similarly enacted economic nexus laws for purposes of its business income and receipts tax.
So those are all sort of the changes that we've seen on the legal landscape over the past sort of year and a half now.
Okay. Thanks, Jen, for going through that timeline with us. I want to switch things over to Ilya now. What are a few challenges or opportunities Pennsylvania CPA's are facing as a result of the changes?
Thank you. I think Jen just mentioned a lot of challenges just by talking about the complexity in the law in Pennsylvania and Philadelphia. That's par for Wayfair.
If you think about Pennsylvania CPAs discussing the same matters across the country, the complexity only grows, because you're not dealing with one jurisdiction. You're dealing with 50 states plus District of Columbia and some states that have municipalities and cities that impose their own state and local tax laws. There's no lack of challenges when discussing Wayfair and its implications on businesses.
The other challenge that we're seeing now is also the spillover of Wayfair into other areas of tax. You have income tax, we've seen some spillover in the excise tax and this area is just only going to continue to develop and become more complex.
An opportunity here is for Pennsylvania CPAs to really get ahead here by thinking about how Wayfair impacts and will impact businesses going forward. It provides for an opportunity to have discussions with clients and address issues besides sales and use tax.
Some of the conversations that we've been having is... “Well let's review what's going on in the sales tax, but also let's discuss what have you been doing on income tax, personal property tax, unclaimed property.” Often we find that state and local tax has been reviewed but not reviewed often enough that in the last couple of years, some of the companies have not been paying attention to the areas where they find out now during the Wayfair conversations they might have exposures and some issues might have been missed.
Wayfair has provided a platform to have discussions about sales and use tax as well as some additional state and local taxes that clients may be, and companies may be subject to, but just not been paying a lot of attention to until now.
How can CPAs – and you've talked about this a little bit Ilya, just as far as getting in front of the clients, which I think is really important to note – but how can CPAs communicate these complexities that have kind of been discussed here to their clients and customers?
That's a great question. I think it's important to have honest conversations with companies about what's going on with Wayfair and how it impacts their business.
There've been a lot of discussions about, “well, is it something that can wait and I'll take care of it later? Is it something going to be changed from let's say federal perspective that it's just going to go away sometime in the future, and it's not something that needs to be addressed immediately?” The answer to that is, “well maybe it's going to be addressed sometime in the future by the federal government.”
Every piece of legislation that's been written so far has been not going anywhere. It's important to think about what needs to be done now as far as the compliance function registrations, and making sure that the companies are complying with the law and filing the returns where they need to be filed.
Waiting and thinking about it is only going to make the problem much worse going forward. The exposure is not going to eliminate itself. What Pennsylvania CPAs should be doing now is having these open conversations telling their clients and prospects that they're not alone in this situation. A lot of the companies are going through the same type of eye-opening moment that, look, sales tax is important. Other taxes that are state and local taxes are important. States and local jurisdictions that have teeth in this game and they'll pursue you and audits will happen if you're ignoring these items, they will catch up with you eventually.
It helps to have some visual aids in these conversations such as charts, maps, summarizing the changes in the law. Wayfair is a perfect example of how states viewed the case and interpreted differently and provided completely different standards... with some similarities, but also differences.
For instance, different effective dates. We have 43 out of 45 states imposing economic nexus now on Wayfair. Not all those effective dates are the same.
If you sprinkle in Marketplace Facilitators Act, enacted by many states, those effective dates are different from remote sales dates often. You have the and/or tests regarding a volume of sales and transaction tests, and those numbers are also different. You have, for instance, on a volume of sales, into a state that ranges from half a million to $100,000.
When you're discussing these things with clients, it really helps to have a one or two-page document at least highlighting some of the differences and showing how this area is very complex. At the same time you can take the client's data and do a quick check and saying, look, based on your prior sales and comparing it to my chart here, I see that you might be in trouble in the following states. Let's discuss them further.
I think just to piggyback a little bit on what Ilya's been talking about. He mentioned before being proactive about reaching out to clients. I think that's extremely important because there are still... We live in state and local tax world, and so the idea that people haven't heard of Wayfair is crazy to us, but a lot of small businesses still don't understand that Wayfair impacts them.
I think it's really important that CPAs take a look at what it is exactly the client does, what it is they're selling, and see how this could be affecting particularly smaller clients, smaller businesses, and sole proprietors, and really staying abreast of the changes and how to proactively get their clients compliant before the state or locality comes knocking.
Obviously the theme here is definitely proactivity as opposed to reacting, I guess. I know that seems like it's pretty challenging when operating in this space. I guess piggybacking off of the communication component, Ilya, how could the role of the CPA play with clients and customers change as a result of online sales tax regulations or laws?
I think that Pennsylvania CPAs and CPAs around the country are now going to be more involved in the state tax functions within these companies, within their clients and prospects. Because, you have to think about the role of controller, and VP of tax and director of tax at the companies, they wear multiple hats.
Sales tax function is fairly complex and the Wayfair is spilling over in other areas of tax law. It happens almost every single day. Each week we read newspapers and we'll say, "Oh my goodness, look what happened in this state. Look what happened in that state."
Even though sometimes you may look at the transaction and volume of sales, it's kind of simple measurements. There's a lot more detail that goes into that. Is that taxable sales, is that gross sales? Also, how do you deal with the issues going forward? For instance, if some of your sales are for resale or exempt.
What I'm trying to say is that as advisers and looking out for the best interest of our clients, we have to be very involved now as we have in the past and also going forward and just looking out for issues that Wayfair now raises to the top, making sure that they're addressed proactively and not being pushed aside.
As we wrap up our conversation here, I'm going to turn back to Jen and see if she brought with her today her crystal ball here to try to look into the future a little bit. What additional changes or issues could be coming down the pike regarding online sales tax laws in Pennsylvania that CPAs might not be aware of, and what should they be preparing for here?
Pennsylvania specifically has started issuing notices to companies that they believe have economic nexus. One thing to look out for is those notices and also the accompanying business activity questionnaire, and to make sure that your client doesn't throw them in the trash. That's what clients tend to do when they see these things. When you're on the department's radar already that's not really advisable.
Following up on that then is audits. I think that we'll see an increased pickup in audits at the state and local level, as sort of this grace period of Wayfair starts to pass by. Accompanying those audits, I think that we're going to see challenges to Public Law 86-272 in terms of the localities and state taxing jurisdictions trying to really challenge whether or not a taxpayer that's claiming the protections of Public Law 86-272 is really falling within those protections or not for income tax purposes.
Finally, I think, with my crystal ball, I would say on the area of mergers and acquisitions, I think we're already seeing really increased due diligence. Companies are increasingly now concerned, they always were concerned, but with Wayfair they're even more concerned now about inheriting potential sales and use tax liabilities. I think that we're going to see really an uptick in due diligences and really variances between what the buyer thinks should be put in escrow and what the seller thinks should be put in escrow.
*Since the recording, Jennifer Weidler Karpchuk changed firms and is now a state and local tax partner with Cozen O'Connor in Philadelphia.