By James DeLuccia, PICPA manager, learning and development
The U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision is affecting how states are levying sales tax on online purchases. It is critical for CPAs – both those in firms and in corporate settings – to communicate the complexities of the new law to their clients, employers, and customers. Ilya Lipin, managing director of state and local tax with BDO USA LLP, and Jennifer Weidler Karpchuk, shareholder and co-chair of state and local taxes at Chamberlain Hrdlicka, spoke with me recently to discuss our post-Wayfair environment and how it will impact businesses in Pennsylvania.
Q: What are a few best practices CPAs should share with clients and employers about the ramifications of the Wayfair decision?
Ilya Lipin: The Wayfair decision essentially requires a thorough review of nexus and taxability determinations for every domestic and foreign company with remote sales in the United States, regardless of the industry or customer base. For those who previously put state taxes on the backburner, it is now time for a direct and candid discussion. Over the past year, many companies surprisingly discovered that they have pre-Wayfair tax exposure caused by taxable sales to nonfiling jurisdictions where they had physical, affiliate, click-through, or cookie nexus, or were subject to use tax notice and reporting requirements. Continued neglect of the nexus profile, unawareness of products/services taxability, and the magnitude of exposure will only result in more unpleasant news in the future when a company gets audited by a taxing authority, issues financial statements, accrues estimated loss to a charge to income pursuant to ASC 450, or is subject to sales-side due diligence. Honest discussion that educates clients on the scope of Wayfair and its implications, as well as a suggested plan of action, will help companies make better informed decisions about their state tax function.
Q: Are there any little-known challenges that have developed for CPAs regarding Wayfair?
Lipin: In Wayfair, the Supreme Court stated that “the argument… that the physical presence rule is clear and easy to apply is unsound.” Today, with 43 of the 45 states that impose sales tax having adopted economic nexus provisions with varying threshold standards, compliance and registration requirements, and due dates, many may wonder whether a post-Wayfair economic nexus world is any clearer or easier to apply. Here are a few challenges taxpayers have encountered post-Wayfair:
- Nexus determinations – Lack of uniformity in Wayfair guidance left many taxpayers frustrated and confused about nexus determinations. The economic nexus standard established by the Wayfair case (delivering more than $100,000 of goods or services into South Dakota or engaging in 200 or more separate transactions for delivery of goods and services into the state) morphed into different measurement standards based on gross or taxable receipts, sales amounts ranging from $100,000 to $500,000, “and/or” tests relating to volume of sales and transactions, measurement periods, and effective dates. Certain states began to update their economic nexus guidance by lowering sales threshold amounts (Arizona and Georgia), eliminating transaction thresholds (Iowa and North Dakota) and cookie nexus provisions (Massachusetts and Ohio), and requiring calculation of thresholds based on sales of the entire affiliated group (Virginia). Thus, an incredible burden has been placed on businesses of all sizes to first determine their nexus footprint in light of the new rules, and thereafter revisit their nexus determinations to ensure timely compliance.
- Physical, affiliate, click-through, and cookie nexus remain relevant – Taxpayers and practitioners need to remember that nexus can be created through other ways besides economic activity in the state.
- Application of marketplace facilitator laws – About 35 states impose marketplace facilitator rules. Many businesses are uncertain if the facilitator or retailer is responsible for determining taxability of goods and services, and which party has the responsibility to collect and maintain exemption certificates. Retailers are realizing they need to separately track sales made via marketplace facilitators and those from direct sales in economic nexus jurisdictions, and to collect and remit sales tax on any sales not made through a marketplace into that state (e.g., sales made through its own website).
- Drop shipments – Manufacturers, wholesalers, and suppliers that drop-ship into states with economic nexus are now subject to a variety of nuanced rules that they may not have needed to follow pre-Wayfair (e.g., a state does not accept home state resale certificates, or a registration requirement to provide a resale certificate). Improper compliance with these unique requirements may lead to potential exposures.
- Registrations – Prior to registering in states with economic nexus provisions, businesses need to determine if they have any past exposure due to having another type of nexus (physical, affiliate, click-through, etc.) in those states pre-Wayfair. To accomplish this task, companies need to revisit their nexus and taxability determinations. Blind registrations in every state are not recommended, as these may subject a business to compliance requirements where it does not have nexus and hinder its ability to mitigate any existing exposure through voluntary disclosure programs.
- Application to inbound companies – Foreign companies should evaluate if the volume of their U.S. sales creates economic nexus. Taxes imposed by states will generally apply, regardless of whether there is a federal tax treaty or if a business has a permanent establishment in the United States.
- Unanticipated compliance burdens – State actions after Wayfair have placed an additional layer of burden on tax departments. Companies with limited internal tax resources are encouraged to seek assistance from professional tax providers to ensure timely and proper compliance with new state tax laws related to Wayfair.
Q: How has Wayfair woven its way into Pennsylvania sales tax?
Jennifer Weidler Karpchuk: When Wayfair was pending in the courts, it had already affected sales tax in Pennsylvania through the enactment of marketplace sales tax legislation that passed as part of Act 43 of 2017. Beginning in March 2018, marketplace facilitators, vendors, and referrers with more than $10,000 in sales into Pennsylvania were required to either collect the sales tax or abide by notice and reporting requirements. Wayfair was decided in June 2018, and the state Department of Revenue asserted its position in January 2019 that taxpayers with $100,000 or more in sales into Pennsylvania no longer had the option of collecting or reporting. Instead, those taxpayers were required to register and collect the state sales tax. In June 2019, the legislature codified the Department of Revenue’s position when it amended the definition of “maintaining a place of business in this Commonwealth." Consistent with the Department’s interpretation, the revised definition provides that vendors having $100,000 or more in gross sales of tangible personal property or services during the preceding 12-month calendar period are considered to be “maintaining a place of business in this Commonwealth” and therefore required to register, collect, and remit sales tax on sales to Pennsylvania customers.
More recently, Wayfair has actually woven its way into Pennsylvania’s corporate net income tax (CNIT). In September 2019, the Department of Revenue issued Corporation Tax Bulletin 2019-04, which created a rebuttable presumption that those out-of-state taxpayers with $500,000 or more of direct or indirect gross receipts sourced to Pennsylvania have nexus for CNIT purposes too. (Read more on this CNIT issue in a CPA Now blog by Richard Botwright.)
Q: What sort of issues do you see coming down the pike regarding Wayfair and its implications? If Pennsylvania companies need to make changes in how they conduct business, how will CPAs play a role in that?
Weidler Karpchuk: The taxpayers who were really impacted by Wayfair are the smaller remote businesses. I think we will see issues with small taxpayers who do not know or understand their sales tax obligations, resulting in compliance issues. I think we will also see issues crop up during due diligence as part of mergers and acquisitions, as we can expect buyers to be even more cautious in light of the potential liabilities of a target company. It is possible we may see taxpayers attempt to challenge the state’s $100,000 threshold under the Commerce Clause, since the facts of Wayfair in South Dakota are not entirely the same as in Pennsylvania.
On the CNIT side, we will see taxpayers challenge the Department of Revenue’s position, particularly since the change was made via a bulletin and not through the legislative process. Also on the CNIT side, I think we will see the Department of Revenue trying to push the limits of Public Law 86-272, while at the same time I think we will see taxpayers trying to hold on and conform themselves to the protections of the law. Another issue to keep an eye on is the City of Philadelphia’s adoption of economic nexus for purposes of its business income and receipts tax. I think we can expect taxpayers to challenge the city’s position in the near future. Both the city’s and the Department of Revenue’s positions could be open to a tax uniformity challenge. CPAs should make sure they are staying on top of the law and any challenges to it so they can file any protective refund claims that may be advisable.
Jennifer Weidler Karpchuk is a shareholder and co-chair of state and local taxes at Chamberlain Hrdlicka. She focuses her practice on state and local tax compliance and litigation. She can be reached at email@example.com.
Ilya A. Lipin is a managing director and Philadelphia state and local tax practice leader at BDO USA LLP. He provides clients with state tax advice in the area of multistate income taxes, sales and use taxes, tax controversy, compliance, and various state and local tax aspects that arise from mergers and acquisitions. He can be reached at firstname.lastname@example.org.
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