Sales Tax State of the Union: Wayfair Three Years Later

The U.S. Supreme Court’s South Dakota v. Wayfair decision was a landmark case for nearly all retailers, drastically expanding sellers’ obligations to collect sales tax in new states. As the concept of economic nexus for sales tax approaches its third birthday, states have had distinctive reactions and enforcement mechanisms. While each state may have its own rules, one thing is quite clear — every seller must review and address its sales tax collection obligations.

Sales tax economic nexus basics

By now, many people are familiar with the concept of economic nexus for sales tax. If a company makes a certain amount of sales in a state, this economic activity is sufficient to establish nexus in the state, thereby creating a sales tax collection obligation. A common threshold is $100,000 in annual sales or 200 separate annual transactions. Yet, even with the prevalence of these sales tax obligations across the country, many sellers misunderstand economic nexus rules, and how these interplay with traditional physical presence.

For the past year there were only two states without an economic nexus rule: Florida and Missouri. In April, the Florida governor signed SB50 into law, enacting economic nexus effective July 1, 2021, with an annual sales threshold of $100,000. Missouri has introduced economic nexus legislation in the past, but it has not been successful. Currently, SB153, which would enact economic nexus starting in 2022, is pending in the Missouri state legislature.

Not all states are the same

Since every state that imposes sales tax has its own rules, it is not a surprise that each economic nexus is a bit different. Two of the biggest outliers include Kansas and Massachusetts.

Kansas

Kansas adopted its economic nexus rule without a minimum sales threshold, which could prove problematic if challenged in court (especially considering the Wayfair decision’s dicta regarding a small-seller exception). However on May 3, 2021, the state legislature overruled the governor’s veto of SB 50, establishing a $100,000 annual sales threshold minimum effective July 1, 2021.

Massachusetts

Prior to Wayfair, Massachusetts established its “cookie nexus” rule, essentially stating that an online retailer has a physical presence in the commonwealth via its digital cookies that are sent to potential customers’ computers located there.

While Massachusetts has now established a traditional economic nexus rule, it continued to enforce its cookie nexus back to October 2017. The Massachusetts Appellate Tax Board recently ruled in favor a taxpayer who challenged the enforcement of this nexus for the nine months preceding the Wayfair decision in U.S. Auto Parts Network, Inc. v. Commissioner of Revenue on January 28, 2021.

How will states find me?

If the seller doesn’t have a physical presence in the state, how will the state know they have economic nexus? There’s not a simple answer to this question, but it is clear, states are finding out.

• Proactive notices — Shortly after the adoption of its economic nexus law, Wisconsin sent notices to many businesses. These letters stated that according to the Department of Revenue’s information, the business’s sales exceeded the threshold and it was required to register and begin sales tax collection.
• Notices after registration — We’ve also seen Departments of Revenue question the start date on a business’s sales tax registration. Massachusetts sent letters to businesses after they registered, requesting their sales information going back to 2018 to determine whether they should have registered under its cookie nexus law, effective October 1, 2017. State auditors followed up to these data requests, eventually threatening to assess based on an estimated amount of sales.
• Cross-referencing data — States can either gather information during an audit of a company’s customer, or cross-reference other filings that the taxpayer has with the state. For instance, we have seen where California reviewed the sales information from the income/franchise tax filing to identify companies that exceeded the economic threshold, but are not registered or remitting sales tax.

Why is compliance so important?

In short, because of the nature of sales tax, if a seller is required to collect sales tax and doesn’t, the tax will then become a liability of the company. This liability is particularly important when a company is either audited by a state or is subject to tax due diligence for a transaction.

1. State audits — Wayfair’s third anniversary is a significant one. Many states have a three-year statute of limitations for sales tax audits. State auditors may wait for a business to have a full three-year period to review, so state audits of remote sellers could increase.
2. Tax due diligence — If you are considering selling or restructuring your company, be aware that any sales tax obligations will be discovered during routine tax due diligence. This can lead to a reduction in sales price, increase in escrow amount, or even a delay in sale to remediate the exposure. With many states now having a collection requirement on the books for a full three years, the exposure for not complying may be significant.
3. Financial statement misrepresentation — The potential liability related to having ignored the Wayfair filing requirements will continue to grow and could potentially result in a material misstatement in the financial statements if not recorded and/or disclosed.

How we can help

State tax changes can be overwhelming. A Wayfair checkup can help you understand your sales tax exposure from economic nexus, and a historical nexus study can help guide your compliance decisions surrounding both sales tax and other state and local taxes.

For some companies, outsourcing your sales tax compliance obligations may allow you to refocus your time on value-added activity. Wherever you are on this journey, CLA’s state and local tax professionals are on top of these shifting state tax rules. We can help guide you through this analysis.

Contact Us