Wayfair three years later: an update and next steps
By Scott D. Davis, Tonneson + Co
In 2018, the United States Supreme Court passed a landmark decision in the Wayfair v. South Dakota case concerning sales tax that broadened states’ abilities to require remote sellers to collect sales tax even if they had no presence in a particular state; the so called ‘economic nexus’. Three or so years after the passing of this landmark decision, how have things changed?
The impact of the Wayfair decision drastically changed and expanded retailers’ responsibilities to collect sales tax in new states. Each state has responded to this decision by instituting their own enforcement mechanisms. While each state may have its own rules – 50 states, 50 rules, one thing has become quite clear: every seller must review and address its tax collection obligations in all states.
Many states have adopted a common threshold of USD 100,000 in annual sales or 200 separate annual transactions. Even with the establishment of these sales tax obligations and standards, after more than three years, many sellers still misunderstand economic nexus and how this interacts with the traditional concept of physical nexus.
Each state has adopted and imposed its own sales tax rules. Many sellers have taken the stance of “let the individual state find me”. With shrinking revenues at the federal level and less money being passed down to the state level, many states have become aggressive in pursuing those sellers who have not registered to collect sales tax in a given state.
The question that is asked is: if a seller does not have a physical presence in a particular state, what will the state do to determine if a particular seller has created nexus? There is no simple answer. The following seem to be the three common schemes being employed by many of the states:
- Proactive notices:
Shortly after the adoption of Wayfair, many states sent letters to many businesses. These letters stated that according to a particular state’s department of revenue information on file, if the sales of a business exceeded the threshold, the business was required to register and begin collecting sales tax.
- Notice after registration:
Many states, like Massachusetts, began questioning the start date of a filed business tax registration. Massachusetts sent letters to businesses after they registered, requesting their sales information going back to 2018 (post-Wayfair decision) to determine whether they should have registered under its Cookie Nexus Law, effective 01 October 2017. State auditors followed up on these data requests, eventually threatening assessments based on an estimated number of sales. The burden fell on the business to prove the Commonwealth incorrect.
- Cross-referencing data:
States have the ability to use information obtained during an audit of a business’s customer, or to cross-reference other filings that the business has within the state. For example, the state of California reviewed the sales information from the income/franchise tax filings to identify businesses that exceeded the economic threshold but are not registered or remitting sales tax.
After taking the above steps and over three years after the passage of Wayfair, a majority of states still have not identified all the entities doing business in their particular states. So what can states do to ensure compliance? States are conducting, and will continue to conduct, more audits. Many states have a three-year statute of limitations for sales tax audits. If a business has never filed in a particular state, the state has the authority to go back as far as they see fit. The statute of limitations does not begin until a filing is actually made. More audits will be coming as states see this as a good way to obtain revenue.
With the three-year anniversary of the Wayfair decision having passed on 23 June 2021 and the ongoing impact of the Covid-19 pandemic impacting state revenues, these audits will likely continue to be conducted in a very aggressive manner. Many will be conducted by third-party firms that will be compensated based on their findings, not on the hours they spend on the audit. In other words, the more findings that a firm makes, the more money they will be paid.
If businesses have not already addressed potential sales tax liabilities in states outside their own, the time to act is now, before receiving an audit letter. If large liabilities exist in states where businesses are not registered, it may be possible to avoid penalties as high as 50% by participating in the state’s Voluntary Disclosure Program. This program allows taxpayers to pay uncollected taxes with either some or all of the associated interest, but with penalties abated. At a minimum, a Wayfair study back to 2018 should be conducted.
Wayfair has changed the way we do business. It has forced businesses to be more alert to where they do business, in a manner they never had to worry about before. With the three-year anniversary of the passage of Wayfair having passed, the playing field is changing as states become more visible in looking to identify businesses that have had nexus in a particular state but never registered.
Scott DavisGGI member firm
Tonneson + Co
Advisory, Auditing & Accounting, Corporate Finance, Tax
Boston and Wakefield (MA), USA
T: +1 781 245 99 99
Tonneson + Co is a certified public accounting firm headquartered in Wakefield, Massachusetts, with additional offices in Boston and Columbia, Maryland. The firm provides privatelyheld businesses, non-profits, multi- family offices, and individuals with tax, audit and business advisory services.
Scott Davis is a Managing Tax Director at Tonneson + Co with over 35 years of experience in international and US indirect taxes. His experience includes: incorporation of US entities, registration with federal, state and local governments, filing of US and state income tax returns including sales and use, local property tax returns and annual reports.
Published: Indirect Taxes Newsletter, No. 13 Spring 2022 l Photo: Belikova Oksana - stock.adobe.com