A retailer’s guide to dealing with the impacts of Wayfair
On June 21, 2018, the U.S. Supreme Court issued its widely anticipated decision in South Dakota v. Wayfair. The Court determined that states may require retailers to collect and remit sales tax even if the retailer lacks a physical presence in the state, giving a nod to South Dakota’s economic nexus provisions.
Before SD v. Wayfair, the default rule was such that if a retailer did not have physical presence in a state taxing jurisdiction, they were not required to collect and remit sales tax. Through the decision, the Court noted that individual purchasers seldom pay the taxes required when the vendor did not collect tax as a result of having no nexus—a move that changed the sales tax game entirely.
What does this mean for your business?
All industries are likely to see an impact from the Wayfair decision, but retail and consumer products are at the top of the list, including e-Commerce and service providers.
When it comes to Wayfair, it’s important to keep in mind that all states aren’t equal. Congress still has the power to set forth standards for nexus applicable to all states. Each state legislature may also act to codify statutes (as long as they do not violate Federal statutes) regarding treatment of out-of-state remote sellers.
The Court’s green light to South Dakota’s statute provides guidance to those with limited business in the state—$100,000 in sales or 200 separate transactions in the current or prior calendar year. However, the economic nexus thresholds are not consistent across states and retroactive start dates are not uniform, so nexus determinations should be considered on a state-by-state basis. States are currently considering and coming forward with their own economic nexus statutes for sales and use taxes.
Companies should also be aware that the Wayfair decision affects various types of taxes, including sales and use tax, gross receipts tax, non-net income tax and state income tax. Risks may include audit assessments, use tax notification penalties, lawsuits by non-government persons (Qui Tam lawsuits), class action lawsuits and more. Additionally, retailers could face reputational and regulatory risks.
To become compliant with current and future policies, we suggest retailers take a five-step approach to sales tax remediation.
Sales tax remediation: five-step approach
Step 1: Determine nexus and filing obligations
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Determine where the company may have nexus
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Determine where the company has a filing obligation
Step 2: Determine the taxability of products and services
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Evaluate the company’s revenue streams to determine the taxability
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Evaluate the company’s customer base for possible exemptions
Step 3: Quantify potential state tax exposure
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Compile sales tax data
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Destination-based sourcing
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State and local tax, interest and penalty rates
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Compute exposure amount
Step 4: Mitigation and disclosure of historical liabilities
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Filing an paying all prior tax returns
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Voluntary disclosure—anonymous basis
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Negotiated settlement
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Do nothing
Step 5: Prospective compliance
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Indirect tax automation
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Utilization of rate software
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In-house or outsource tax return function
Managing sales tax determination and reporting: What are my options?
There are various options when it comes to sales tax determination and reporting—each having their unique advantages and challenges.
Tax determination
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Understand how the Company’s products and services are characterized for tax purposes
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Understand how and where the Company’s products and services are sold (sourcing)
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Align contracts and billing systems to clearly identify each revenue stream
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Acquire a third-party taxability determination software
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Acquire a tax rate subscription
Tax compliance reporting
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Maintain existing process at larger capacity
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Acquire a third-party tax reporting software
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Outsource tax reporting
The material discussed in this blog post is pulled from BDO’s webinar, “How to Deal With the Impacts of Wayfair.” Visit BDO's Wayfair Resource Center for more information, and to access an interactive map where you can see the thresholds, legal effective dates, and administrative enforcement dates by state. Please note that material discussed in this blog post is meant to act as a guide.
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