Navigating the Post-Wayfair World




Background 

A state must have a strong connection, also known as “nexus,” to an out-of-state business before it can impose sales and use tax obligations on that business. Previously, physical presence was the law of the land—a business had to have an office, warehouse, employees, or some other physical presence in the taxing state for tax nexus to exist. In 2018, the Supreme Court overturned the decades-old physical presence requirement and ruled that states can impose sales tax obligations on out-of-state businesses with no physical presence in the state.
Post-Wayfair, nexus exists for sales tax purposes when a “taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Nexus can still be established by physical presence, but can now also be established by economic or virtual contacts. This new standard, referred to as economic nexus, significantly expands taxpayers’ obligations to report, collect and remit sales tax.


Economic Nexus 

Economic nexus exists when a business engages in a certain amount of economic activity in a particular state. If the business exceeds certain thresholds—the “sales threshold” and/or the “transaction threshold”—the business is obligated to register, report, collect and remit sales and use tax in the particular state, regardless of physical presence. The sales threshold evaluates the amount of sales a business makes to residents within the state. The transaction threshold considers how many individual transactions are conducted by the business within the state. Businesses that fall under these thresholds are exempt from sales tax obligations under a small seller exception. However, even exempt small sellers may be subject to state notice and reporting requirements.
The Supreme Court in Wayfair did not provide bright-line rules or universal thresholds. Instead, the Court gave states broad authority to adopt and implement state-specific nexus standards. Therefore, businesses must monitor developments in states where they have economic ties and develop a strategy for compliance.

Economic Nexus Laws, By State

As of late January 2019, over 30 states have proposed or enacted new economic nexus laws in light of Wayfair. Of the states that have enacted economic nexus laws, most have already taken effect.
Status of Economic Nexus Laws
(as of January 2019)
States
Economic nexus laws enacted and in effect
Alabama, Connecticut, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin
Economic nexus laws enacted but not in effect(pending litigation)
Tennessee
Economic nexus laws enacted with upcomingenforcement 
Wyoming – enforced February 1, 2019
California – enforced April 1, 2019
Colorado – enforced June 1, 2019
Pennsylvania – enforced July 1, 2019
Texas – enforced October 1, 2019
Economic nexus laws proposed
Arkansas, Kansas, Louisiana, New Mexico
No Action
Arizona, Florida, Missouri, Virginia
No Sales Tax
New Hampshire, Oregon, Montana, Alaska, and Delaware

State Variations 

Economic nexus laws vary from state to state, and these variations require careful attention. The devil is in the details: slight differences and nuances can create entirely different requirements, even between neighboring states. Below is a list of key variations that businesses should be on the lookout for when reviewing state laws.
  1. Sources of Law. States have taken different approaches in terms of how they are embracing economic nexus standards. A handful of states already had laws on the books that became effective at the time of the Wayfair decision. Many others passed legislation shortly after the decision came out in mid-2018. Other states have issued guidance that implements new standards by interpreting existing law. Guidance can take many forms, including notices or bulletins posted on state department websites. Businesses should routinely monitor relevant state revenue departments’ websites to stay up to date on developments.
  2. Sales Thresholds. Sales thresholds across states vary from $10,000 to $500,000 in sales. Many states have embraced the sales threshold ($100,000) set forth by South Dakota. Some states have higher sales thresholds, including Alabama ($250,000), Connecticut ($250,000), Georgia ($250,000), Massachusetts ($500,000), Mississippi ($250,000), New York ($300,000), Ohio ($500,000) and Tennessee ($500,000). One state currently has a lower sales threshold, Oklahoma ($10,000).
  3. Basis for measuring sales. States may base the sales threshold on gross sales, gross revenues, retail sales, gross receipts, or taxable sales. In addition, a number of states do not distinguish between taxable and non-taxable sales when determining if the sales threshold is met.
  4. Transaction Thresholds. Again, many states have embraced the transaction threshold (200 transactions) set forth by South Dakota. However, a handful of states do not have a transaction threshold at all including, Alabama, Mississippi, South Carolina, and Tennessee. For purposes of nexus, a transaction may be very broadly defined.
  5. Thresholds (“Or” vs. “And”). In most states, only one of the thresholds must be met before obligations are imposed (i.e., a seller who exceeds the sales threshold or the transaction threshold must collect and remit). However, three states—Connecticut, New York, and Massachusetts—require both thresholds be satisfied (i.e., a seller who exceeds the sales threshold and the transaction threshold must collect and remit).
  6. Lookback Period. The relevant lookback period for determining if the thresholds are met also varies. Some state laws look to the previous year’s sales history, while others consider both the previous year and the current year. In some instances, “year” is defined as the tax year, and in others, the calendar year.
  7. Reporting Requirements. One key strategy businesses facing nexus need to develop is what to do about prior years. Some states allow so-called “voluntary disclosure” to account for past years; other states have no such period of redemption. See, http://www.mtc.gov/Nexus-Program/Multistate-Voluntary-Disclosure-Program for more information. At issue is whether a business feels it necessary to file tax returns to toll the statute of limitations on previously-questionable years.

Retroactivity 

A key question coming out of Wayfair was whether states could retroactively apply economic nexus standards. Few states have attempted retroactive enforcement, and those that have, have experienced strong pushback.

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Wisconsin enacted legislation in late 2018 adopting new economic nexus laws. Beginning October 1, 2018, Wisconsin requires remote sellers (out-of-state retailers) to register, collect and remit sales and use tax on sales of taxable products and services in the state. The state initially implemented economic nexus rules by issuing emergency rules, which were later codified by an amendment to the sales and use tax statutes (the "Wisconsin Economic Nexus Law"). SeeEmR18192017 Wis. Act. 368.
Under the Wisconsin Economic Nexus Law, remote sellers are required to register, collect and remit Wisconsin sales and use tax if, in the previous or current year, either criterion applies:
  1. The retailer's annual gross sales into Wisconsin exceed $100,000 (the "sales threshold"); or
  2. The retailer's annual number of separate sales transactions in Wisconsin is 200 or more (the "transaction threshold").

Small Seller Exception

Remote sellers whose business activities in Wisconsin fall under the thresholds are not subject to sales tax obligations under the small seller exception. This exception comes with two important caveats. First, the exception only applies to remote sellers who do not have a physical presence in the state. Second, the exception is lost if a remote seller's business activity exceeds either of the thresholds. Sales tax obligations kick in, and the remote seller must immediately register with the Wisconsin Department of Revenue (WI DOR) when a seller makes a sale that brings its annual gross sales over $100,000 or annual number of transactions to 200. To illustrate, consider the following scenarios:
Scenario One: A remote seller does not meet either threshold in 2017 or 2018 and qualifies for the small seller exception. On February 1, 2019, the remote seller makes a sale that brings its annual gross sales for the current year (2018) to $100,001—a dollar over the sales threshold. The remote seller must register and begin collecting sales tax beginning with its next sales transaction in the state.
Scenario Two: A remote seller does not meet either threshold in 2017 or 2018 and qualifies for the small seller exception. On February 1, 2019, the remote seller makes a transaction that brings its number of separate sales transactions in the current year (2018) from 199 to 200. The remote seller must register and collect sales tax beginning with the 200th transaction made on February 1.
In both of these scenarios, the remote seller would need to register, collect and remit for the remainder of the 2018 taxable year and all of 2019. If in 2019, a seller's business activity drops below the thresholds, the seller can deactivate its seller's permit, effective January 1, 2020, and at that time, stop collecting and remitting Wisconsin sales tax.

Lookback Period

The Wisconsin Economic Nexus Law looks to the retailer's business activity in the "previous and current year" when evaluating if the threshold is met. Wisconsin defines "year" as the retailer's taxable year for federal income tax purposes. The Wisconsin Economic Nexus Law took effect on October 1, 2018. As we will discuss in Part Three of this series, the effective date of a state's economic nexus rules is an important factor when considering liability and developing a compliance schedule.

Sales Threshold

In Wisconsin, the sales threshold is determined by a remote seller's annual gross sales. Though remote sellers are only required to collect and remit sales tax on taxable sales, when evaluating annual gross sales, both taxable and nontaxable sales (i.e. sales subject to an exemption) are included. In addition, all sales into Wisconsin by the retailer on behalf of other persons and all sales into Wisconsin by another person on the retailer's behalf are included.

Transaction Threshold

Similar to the sales threshold, the transaction threshold includes both taxable and nontaxable sales, as well as sales into Wisconsin by the retailer on behalf of other persons and all sales into Wisconsin by another person on the retailer's behalf. In addition, the following nuances apply:
  • An invoice is a separate sales transaction. An invoice for multiple products is still considered one separate sales transaction.
  • A periodic payment of a lease or license is a separate sales transaction.
  • A deposit made in advance of a sale is not a separate sales transaction.

Registration/Permits

A remote seller with an active seller's permit in Wisconsin must collect and remit, regardless of whether the retailer is actually required to have the permit. Accordingly, registered remote sellers whose business activity drops below the thresholds must inactivate their sellers' permits with the DOR; otherwise, the business is still obligated to collect and remit.

Marketplace Seller

The WI DOR has indicated through guidance that a third-party remote seller that sells through a marketplace is not required to register for Wisconsin sales tax if the marketplace is collecting and remitting tax on such sales. A marketplace that is a remote seller and does not qualify for the small seller exception is required to register, collect and remit on taxable sales made on behalf of third-party sellers.

Taxable Products and Services

Unless an exemption applies, Wisconsin sales and use tax is imposed on sales of the following:
  1. Tangible personal property
  2. Certain digital goods, additional digital goods, digital code
  3. Taxable services
  4. Coins and stamps
SeeWI DOR Publication 201 for an exhaustive list of taxable items.
The WI DOR has also indicated through guidance that a remote seller who only makes nontaxable sales into the state is not subject to sales tax obligations, regardless of the sales volume or number of transactions. For example, a remote seller that is a wholesaler and only sells products for resale is not required to register.


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All businesses should be assessing how the Court's decision impacts operations. Generally, remote sellers can be any business that sells goods or services from one state to another. Though much of the focus post-Wayfair has been on the sale of tangible personal property (i.e., goods), many states also assess sales tax on various services—including telecommunication, management and utility services. Some states have even begun to tax digital goods as well.
Furthermore, even though the Wayfair case dealt with large retailers, smaller and middle-market retailers are impacted as well. Even businesses that are not resellers, likely do business with vendors and suppliers who are adjusting their operations in light of the decision. In this Legal Update, we will offer step by step guidance for conducting an economic nexus analysis. We will also discuss changes that should be anticipated regardless of your businesses location on the supply chain. Let there be no doubt, Wayfair has changed the landscape for everyone.

Be Proactive 

As we wrote in Part One, over 30 states enacted economic nexus laws since mid-2018, most of which have already taken effect. The narrow compliance period in a post Wayfairbusiness environment has created urgency for affected businesses. Thus, businesses not currently collecting and remitting sales tax in states where economic nexus exists may face increased compliance issues and a possible growing deferred liability.
The risks of non-compliance run high. Non-compliant businesses can be liable for directly paying amounts owed out of pocket (rather than from the customer). Non-compliant businesses can also be hit with hefty penalties and fees. Moreover, many states impose personal liability on those operating the business (i.e., officers, directors, partners, managers, or other "responsible persons"), with automatic veil-piercing statues, for the failure to collect and remit applicable taxes.
We know now that in this post-Wayfair world, companies doing business in multiple states will almost certainly have expanded sales tax obligations. Rather than waiting to receive a nexus questionnaire in the mail from one of the many states passing legislation, businesses need to accept that the cost of doing business will likely increase and begin to take proactive action.
Proactivity begins with having the proper resources in place. Assess whether current processes—software, staffing, external resources—are sufficient to navigate the post-Wayfair world.
Post-Wayfair Resource Checklist
  • Accounting Software. Reliable, detailed accounting/bookkeeping software that can effectively sort sales by jurisdiction (zip code and state).
  • Point of Sale Software. POS software that can apply the correct taxability determinations (including varying sourcing rules) and accurately calculate sales tax.
  • Sales Tax Software. Sales tax software can automate much of the collection and remittance process. Understand that implementation takes time, and can be expensive.
  • Staffing/External Resources. Nexus analysis is heavily dependent on the specific language of state laws. This is complex, and requires careful attention to detail. Consider whether your current staffing arrangements have the capacity to take on this analysis, and outsource this work to an outside tax advisor if necessary.

Be Strategic

All businesses that conduct business out of state will need to conduct a nexus analysis to determine where they have obligations. Though this analysis will vary for every business, we have identified 6 key steps.

Step One: Review sales history by state.

To begin, use your accounting software to review your sales history in every state. In each state that collects sales tax, identify the number of sales made annually into that state and the number of transactions conducted annually in the state. Create a chart like the one below that shows each state that collects sales tax, along with the number of sales in the previous year, the number of sales in the current year, the total dollar value of the sales in the previous year and the total dollar value of the sales in the current year.
A bit of good news: five states (New Hampshire, Oregon, Montana, Alaska and Delaware) do not collect sales tax.
Example No. 1 – State-by-State Sales History
Number of SalesPrevious Year* [2018]
Number of SalesCurrent Year* [2019]
Total Dollar ValuePrevious Year* [2018]
Total Dollar ValueCurrent Year*
[2019]
State #1
70
45
$500,000
$300,000
State #2
250
95
$830,000
$300,500
The appropriate benchmarks for "previous year" and "current year" will vary from state to state depending on how that state defines "year." Some states define "year" as a business's taxable year, others define it as a calendar year, and some define it as the prior 12 months. The examples provided here contemplate a calendar year.

Step Two: Conduct a state-by-state nexus analysis.

Next, review the economic nexus standards in each state where your business has sales activity. Compare the sales and transaction thresholds set forth by the state economic nexus standard to your sales activity and determine whether you have nexus in that state. Remember, states have not followed a uniform approach in adopting economic nexus laws, and variations exist from state to state. When reviewing state laws, keep in mind the following pointers:
  • Physical Presence. Nexus can still be established by physical presence, and the traditional physical presence rules still apply. For example, owning or leasing property in a state, conducting in-person activities in a state, and providing in-person services in a state (among many other activities) still creates nexus.
  • Variations. In Part One, we discussed a number of key variations between state economic nexus standards. Keep an eye out for these variations and remember that slight variations in wording and definitions (even a single word) can make a significant difference.
  • Update Sales History. Certain nuances in state law may require refining the sales history data that was collected during step one. For example, Wisconsin defines "year" as a business's taxable year. As we noted above, the examples provided here contemplate a calendar year. So, our sales history data for Wisconsin would need to be updated to reflect the businesses previous taxable year (2017) and current taxable year (2018), rather than the previous (2018) and current calendar (2019) years.
  • "No-Nexus Determination." If applicable, make a "No-Nexus" Determination. Sometimes being proactive means having your legal position well determined and filing no returns. For example, if you fit into one of the exemptions for a particular state's nexus requirement, that documentation can be retained for future contact.

Step Three: Identify potential tax liability in each state.

Once you determine where you have nexus, identify the potential tax liability in each of these states. Assess the dollar value of taxable sales made into the state, multiply by the applicable tax rates and add any penalties and interest for your total exposure in the state. Again, the applicable rates and values will vary state to state. Sales tax software can automate much of this analysis.
Example No. 2 – Potential Liability
State
Year
Total Dollar Value
Taxable Sales
Tax Due at 5%
Penalties and Interest 100%
Total Exposure
State #1
Previous Year
$500,000
$450,000
$22,500
$22,500
$45,000
Current
Year
$300,000
$200,000
$10,000
$10,000
$20,000

Step Four: Consider risk mitigation tactics.

Risk mitigation tactics may help businesses reduce their liability in certain circumstances. Some states offer voluntary disclosure agreements (VDA's), which can ease compliance burdens for non-compliant participants by limiting the lookback periods, reducing fines and penalties and establishing payment plans. Contact your tax advisor to determine if this is an appropriate option for your business.

Step Five: Develop a compliance schedule.

Compliance will not happen overnight. Remote sellers should develop a compliance schedule that fits the specific needs of their business. Calendar the dates you will register with the state, begin collecting sales tax from your customers in that state, and remit the collected tax back to the state. Prioritize compliance in the states (1) where you have the largest potential liability, and (2) have the longest lookback periods.
Some companies may find the Streamlined Sales Tax Registration System (SSTRS) software helpful. A word of caution, however—registering through the SSTRS software automatically registers your business in all 24 member states; possibly subjecting you to sales tax obligations that you are not actually responsible for.
We anticipate that states will argue that remote sellers must collect and remit as of the day the state's economic nexus laws became effective, if their historical sales activity exceeded the applicable thresholds. If that's the case, liability begins to accrue on the day the state law became effective.
Be sure to keep detailed records of all compliance efforts (or "no-nexus" determinations) —these records may be helpful in the event of an audit.

Step Six: Implement monitoring programs.

As the sales and use tax landscape continues to evolve, so should your monitoring programs. An effective monitoring program should track external and internal changes. Externally, you should have a system for monitoring state law, including sales and transaction thresholds, taxability, tax rates and filing requirements. These standards will undoubtedly continue to evolve as issues are played out in court. Internally, an effective monitoring program should automatically signal when sales or activities exceed thresholds in each state and thus trigger sales tax obligations. They should also monitor payment and filing requirements.


Be Prepared

  • Audits/Enforcement Activity. Given the flurry of activity at the state level in the first six months post-Wayfair, we anticipate that in the next six months we will see a growing increase in enforcement activity. Businesses should review their record-keeping and documentation practices now to ensure that the documentation required to support potential future audits (e.g., exemption certificates, resale certificates, invoices, etc.) is readily available.
  • Exit Planning. Sales and use tax compliance is routinely assessed during due diligence, and is oftentimes the largest state tax exposure item. These discoveries can lead to an adjustment in valuations and indemnification clauses. Again, having the appropriate documentation readily accessible will save time and costs down the road.
  • Beyond State Sales Tax. We anticipate localities may embrace economic nexus rules as well. With over 10,000 taxing jurisdictions in the United States, it is easy to see the critical role accounting and sales tax software will take post-Wayfair. In addition, we anticipate the Wayfair decision will eventually lead to changes in income and franchise tax rules.
  • Other Business Implications. All contracts for the sales of goods should be reviewed to ensure that sales tax is properly contemplated. Businesses should also review their invoices to determine if they properly display tax calculations and whether they bundle taxable and exempt products. Finally, be prepared for changes in your vendor and supply contracts.



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