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Perspectives

Post-'Wayfair' sales tax case: The path forward for sales and use tax reporting

Understand the potential impact of the pivotal 'Wayfair' sales tax ruling and the steps you can take to prepare for the changes and challenges that may lie ahead.

Implications of the 'Wayfair' sales tax case

The US Supreme Court’s June 2018 ruling in Wayfair, Inc. et al.1 (Wayfair) has shifted the ground under online retailers, consumers, and state tax authorities across the country. In the wake of this historic decision overturning the decades-old physical presence nexus rule for sales and use tax collection, states now have broader authority to require online retailers to collect and remit sales tax on taxable sales into a state.

While some online retailers had already collected sales tax prior to the ruling, more could now be compelled to do so. Online sellers should seek an awareness of how the decision is likely to result in changes to states’ sales and use tax laws in states where they sell products and services, what questions remain regarding the impact of the Wayfair sales tax decision at both the state and federal levels, and the potential financial reporting implications.

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An overview of the 'Wayfair' Supreme Court decision

In Wayfair, the court overturned the 1992 Supreme Court ruling in Quill Corp. v. North Dakota2 (Quill), which had interpreted the “substantial nexus” requirement of the dormant Commerce Clause jurisprudence as requiring a “physical presence” (i.e., offices, branches, warehouses, employees, and activities of independent contractors) in a state in order for a state to impose a sales tax collection requirement on sellers.

The main reasons the US Supreme Court found for overturning Quill are the following:

  • The application of a physical presence requirement is an “incorrect interpretation of the Commerce Clause” particularly when measured in a vastly expanded e-commerce marketplace.
  • South Dakota’s law does not violate substantial nexus requirements because remote sellers have the potential to maintain a significant virtual presence in the state.
  • The principle of stare decisis cannot stand when it prohibits states from exercising lawful powers.

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Feeling the potential impact

While companies of all sizes may be impacted by the Wayfair ruling, these types of companies are likely to be the most affected:

  • Remote sellers
  • E-commerce, non-US organizations with inbound sales
  • Companies with limited nexus currently and/or a limited tax systems footprint

'Wayfair' sales tax: Questions and follow up

Even with the South Dakota v. 'Wayfair' Supreme Court ruling that physical presence is no longer a requirement, the court’s decision creates numerous follow-up considerations for sellers, state tax authorities, and lawmakers that include the following.

Impacts and actions for online retailers

Online retailers should consider the following actions to address the changes expected to come from Wayfair:

  • Identify and prioritize the jurisdictions relevant to the company’s business. 
  • Determine the existing statutory regimes in those jurisdictions. 
  • Determine what systems, processes, and information may be required to meet new tax filing policies. 
  • Develop a strategy to become compliant.
  • Consider other potential non-indirect tax impacts.
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These actions can provide the framework for a company to evaluate its nexus indicia—the taxability of goods or services in that jurisdiction, especially digital goods and services such as cloud and software as a service; the capability to identify relevant transactions for nexus purposes; and the dollar amount of exposure. For many online retailers, especially mid-size and smaller ones, this may prove challenging.

These actions can provide the framework for a company to evaluate its nexus indicia—the taxability of goods or services in that jurisdiction, especially digital goods and services such as cloud and software as a service; the capability to identify relevant transactions for nexus purposes; and the dollar amount of exposure. For many online retailers, especially mid-size and smaller ones, this may prove challenging.

Systems considerations in the wake of 'Wayfair'

Companies need information from enterprise resource plannings (ERP) systems, as well as e-commerce and other types of systems that store customer and other information, in their efforts to comply with state and local regulations around sales and use tax.

ERP systems also normally interface with third-party tax software, which many businesses use to determine the taxability of goods and services. The systems, working together, can help companies stay abreast of state and local taxability rules, tax rates, and exemptions that companies may opt to take. Nexus is a key consideration in third-party tax software configuration and, thus, is likely to need to be reviewed in light of Wayfair.

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Doing business in a post-'Wayfair' sales tax era

The many ripple effects of the Wayfair decision could take years to become clear. In the meantime, there are several steps that tax executives can take to prepare their business for the potential impacts from the Wayfair ruling—from education company stakeholders and analyzing the impact on the tax and operational functions, to identifying IT system requirements, developing a roadmap to address gaps and potential exposure areas

As state tax authorities and lawmakers focus on the work ahead of them, businesses should monitor state developments closely and respond quickly to the Wayfair ruling to avoid potential uncollected and/or unreported tax liabilities.

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Endnotes

1 South Dakota v. Wayfair, Inc., et al., No. 17-494 (June 21, 2018) 585 US. A copy of the decision is available here.

2 504 U.S. 298 (1992).

3 For example, see Alabama, Ala. Reg. 810-6-2-.90.3; Indiana, Ind. Code Ann. §6-2.5-2-1(c); Iowa, Iowa Code Ann. §423.14A(2-3); Kentucky, Ky. Rev. Stat. Ann. §139.340(2)(g); Maryland, Proposed Md. Regs. Code §03.06.01.33.

4 For example, see Hawaii, Haw. Rev. Stat. §237-24(18); Maine, Me. Rev. Stat. Ann. tit. 36,§ 1951-B(3); Massachusetts, 830 CMR 64H.1.7(3); Rhode Island, R.I. Gen. Laws § 44-18.2-3(A).

5 It should be noted that the ultimate question of the constitutionality of South Dakota’s law was not answered by the court in the Wayfair decision; to be potentially addressed by the South Dakota Supreme Court on remand.

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Contacts

Stephanie Csan
Managing Director
Deloitte Tax LLP
+1 973 602 6435

Holly Hamby
Managing Director
Deloitte Tax LLP
+1 713 982 2830

Rick Heller
Managing Director
Deloitte Tax LLP
+1 973 602 4088

Les Jackson
Managing Director
Deloitte Tax LLP
+1 713 982 2406

Galina Philipovitch
Managing Director
Deloitte Tax LLP
+1 408 704 2456

Stephanie Gilfeather
Senior Manager
Deloitte Tax LLP
+1 415 783 7091

David Welliver
Senior Manager
Deloitte Tax LLP
+1 612 659 2938

 

 

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