Restaurants Aren’t Immune to Wayfair’s Sales Tax Changes
This summer, the U.S. Supreme Court issued its widely anticipated decision in South Dakota v. Wayfair
. The Court held that states may require a business to collect and remit sales and use taxes even if the business has no in-state physical presence. While many online retailers have reacted to this huge shift by registering for sales/use taxes in states where they have sales, but no in-state presence, restaurant owners and operators must also ask themselves: Is my business now subject to additional state and local taxes based on any sales or purchases of products or services completed across state lines?
decision means that states are now free to subject businesses to sales taxes based on an "economic" presence (having customers) within their state. This means that businesses that provide services or deliver their products to customers located in another state may have to start complying with state and local taxes.
For example, a Texas barbecue chain that sells its world-famous barbecue sauce online to customers nationwide now has to evaluate its compliance with state and local taxes in all of the jurisdictions where the barbecue sauce buyers live. Or, take a brewery based in Massachusetts. If that brewery sells its beer or other items online to consumers, the business should now reevaluate its sales tax compliance and business licensing in all of the relevant state and local jurisdictions. Alternatively, perhaps a business sells a membership that provides customers with either reservations during peak hours, occasional promotional items such as discounted meals or two for one specials, free appetizers or desserts, or a discounted or complimentary bottle of wine – these types of sales would not only contribute to creating economic nexus, they could also be creating new taxability and compliance issues for businesses. Regardless of what kind of product or service is sold across state lines, restaurants should examine their tax compliance post-Wayfair
How Restaurants Can Measure Their Tax Risk Post-Wayfair
Of course, Wayfair
has widespread implications, from state and local tax consulting and compliance matters to increased exposure for businesses involved in M&A transactions. It also supports the validity of state income taxes imposed on out-of-state businesses that exceed certain sales volume thresholds in the state (i.e., economic “factor-presence” nexus statutes, which some states have enacted in recent years).
Restaurants can evaluate their tax and compliance risks by answering the following questions:
- Does your company make sales to customers in states in which you are not registered or filing sales/use tax returns?
- Does your company ship or deliver goods, or provide services to customers located in states where you have little or no in-state physical presence?
- Does your company make retail sales of tangible goods in addition to “food”?
- Does your company provide memberships, online services or make sales of digital goods?
- Does your company file sales/use tax returns in every state where you ship or deliver goods or provide services?
- Has your company received a “nexus questionnaire” or received audit or tax notices from any state where you are not currently registered for sales/use taxes?
- Do you provide delivery services/personnel, and how far do they travel to deliver your products?
- Do you use a third-party delivery service or an online ordering service that facilitates sales of your products?
If your restaurant business can answer “yes” to any of the questions above, the company is likely impacted by Wayfair
and should begin taking the following steps towards evaluating your compliance.
STEP 1: DETERMINE NEXUS AND FILING OBLIGATIONS
Over 30 states have enacted economic presence nexus statutes for sales and use tax purposes and nine states have enacted economic “factor presence” statutes for income tax purposes. The number of states that adopt economic nexus statutes is expected to grow in the months to come.
In many states, $100,000 or more in sales or 200 or more transactions on an annual basis results in economic nexus and, therefore, a filing obligation. Restaurants need to determine whether the volume of sales they complete in each state meets that state’s economic nexus threshold, which would then trigger a sales/use tax filing requirement.
Since U.S. tax treaties apply at the federal level but not the state level, foreign restaurants selling products or services into the U.S. will also be subject to states’ economic nexus statutes and sales/use tax collection and compliance requirements.
Learn more about states’ economic nexus laws by viewing our interactive U.S. map for sales/use tax
STEP 2: EVALUATE PRODUCT AND SERVICE TAXABILITY
For sales and use tax purposes, restaurants need to know whether the products and services that they sell (and also the purchases they make) are subject to sales and use tax in the states and localities where they have nexus. The Wayfair
ruling is far-reaching and many restaurant suppliers (equipment, food, supplies, POS systems/software, etc.) may also be impacted. Like restaurants, many suppliers will also need to become more compliant in jurisdictions where they may not have had nexus in the past, but now they may need to register and begin charging sales tax to their restaurant customers, unless they are provided with exemption/resale certificate.
As many restaurant owners likely know, jurisdictions do not treat restaurant supplies or equipment in the same manner for sales/use tax purposes, however the suppliers may or may not be up to speed with all the exemptions available to restaurant customers in jurisdictions where they were never previously registered. Now, restaurants will likely need to provide exemption/resale documentation to the suppliers to avoid overcharging of sales tax on items that should be exempt, such as menus, food prep/storage equipment, and countless other items that may be exempt in a restaurant’s primary jurisdiction, but not in all jurisdictions.
STEP 3: QUANTIFY POTENTIAL STATE TAX EXPOSURE
In states where nexus and tax exposure exists for prior periods, companies should quantify the historical sales and use tax and state income tax exposures using historical sales and income data and totals by state and by product. Of note, “food” may have a different definition from one jurisdiction to another, not to mention the taxability of dine-in or carry-out food, different types of beverages being classified or taxed differently, delivery charges considered taxable or not, etc. For financial reporting purposes, this state tax exposure amount may need to be recorded as a liability.
STEP 4: MITIGATE AND DISCLOSE HISTORICAL TAX LIABILITIES
Restaurants’ exposure estimates should then be used to determine appropriate efforts to mitigate and disclose taxes. The course of action may differ for each state, and may include:
- Sales/Use Tax Mitigation: Historical tax liability estimates are generally calculated before favorable adjustments associated with exemption and other documentation are obtained from customers (such as sales to exempt organizations). Customers generally have an obligation to pay use tax directly to a taxing authority if the vendor does not collect the tax. Documentation from customers (e.g. exemption certificates, proof of use tax payment, proof of payment through audit), may significantly reduce the sales and use tax liability that you ultimately owe the state.
STEP 5: IMPROVE PROCESSES IN PREPARATION FOR FUTURE COMPLIANCE OBLIGATIONS
- Voluntary Disclosure or Amnesty Programs: Pursuing a Voluntary Disclosure Agreement (VDA) or participating in Amnesty programs (if available) with taxing authorities can significantly reduce the tax, penalties, and interest ultimately paid to resolve historical tax liabilities. VDAs and Amnesty programs can also streamline registration, tax filings, and payment of the historical tax liabilities.
Once the restaurant has determined in which states it has nexus, which of its products and services are subject to sales and use tax, and resolved any potential historical tax liabilities, it may need process improvement or ongoing assistance with prospective sales/use tax and state income tax compliance obligations. Through the use of advanced technology, businesses and tax departments are able to shift their resources to value-added activities and strategic tax planning while minimizing their compliance costs. Indirect tax automation technology optimizes sales and use tax processes and reduces costs by increasing efficiencies with the introduction of enhanced processes and applications.
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