What is the Wayfair case, and what does it mean?

The Wayfair case was decided by the Supreme Court in June of 2018 (South Dakota v. Wayfair). It has largely changed the landscape for sales and use tax, not only in South Dakota, but across the country. Wayfair has established a standard of what is called economic nexus

Prior to the Wayfair case, the standard for being required to collect and remit sales tax came from the 1992 Supreme Court ruling in Quill Corp. v. North Dakota. In Quill, the Supreme Court ruled that in order to have sufficient nexus (connection) with a state, physical presence within the state was required. Wayfair has overturned the physical presence standard that we’ve relied upon for more than 25 years. 

In this new landscape, states are now establishing economic thresholds for the amount of sales dollars and / or number of transactions taking place within the state to determine if a taxpayer has created economic nexus. Now, not only does having a physical presence in a state create nexus, but strictly an economic presence,  meeting these thresholds, will legally require taxpayers to collect and remit sales tax to that state. 

In the past year, virtually every state that imposes a sales tax has enacted legislation to conform to the new economic nexus standard. Each state has established their own thresholds for economic nexus, including sales thresholds ranging from $10,000 to $500,000.  Additionally, some states do not impose a numerical threshold for the number of transactions taking place within the state. Furthermore, each state’s requirements for registration and filing vary, and many local jurisdictions impose a sales tax as well. For example, in California, there are over 2,500 different sales tax rates when considering the separate local jurisdictions!

What should businesses be doing in response to Wayfair?

Wayfair impacts any business, in any industry, that sells to or services out-of-state customers. 

The first step that should be taken is to gather information. A business with out-of-state customers should look at the states where they file income tax returns, states that sales representatives visit, and customer lists to determine where sales are ultimately being made. 

Once an organization has information about the states where they are transacting business, they can determine potential exposure for sales and use tax in those states. This can also serve as a monitoring tool going forward for states where economic thresholds may not currently be met. It will be important for businesses to continue this analysis on an ongoing basis as state laws and guidance are constantly being updated. 

After gaining an understanding of potential exposure, every business will need to formulate their own plan for compliance. When deciding how to move forward, some important considerations will be: (1) whether the organization has the personnel capable to prepare these new filings; (2) whether current accounting records are generating the most accurate information necessary; and (3) determining if the business may need new exemption certificates from customers. 

What can Hobe & Lucas do to help?

Our office can work with you to complete a nexus study in which we will evaluate the states in which your business may have nexus. This can be done from both a sales and use tax perspective as well as an income tax perspective. While the Wayfair case doesn’t impact nexus standards for income tax purposes, as states seek to capitalize on new revenue, it can be a good idea to revisit filing requirements that may not have been thought about in recent years. 

Additionally, for businesses that prefer to take a more DIY approach, we can be involved to help with specific jurisdictional research as well as assistance with voluntary disclosure agreements. For states that have Wayfair effective dates that may have already passed, many states offer an opportunity to become compliant through a voluntary disclosure agreement. Our office can work with you to make sure that these applications are prepared completely and accurately for the best outcome in each scenario. 

For many businesses, the cost and effort of compliance will prove to be quite burdensome. In that case, we can provide referrals to third party providers that can facilitate automated sales and use tax compliance. 

This area of tax law is changing rapidly, and if you have questions or concerns about how this will impact your business, we invite you to contact our office for assistance. 

Are you paying the proper amount of sales and use taxes?

Stedman_Kevinby: Kevin Stedman, Sr. Tax Manager

As a business owner, paying sales or use tax has most likely become second nature as a cost of doing business.  In recent years, states looking for additional revenue sources have adopted changes that have expanded the tax base and increased the tax rate overall.

As an example, Ohio has a proposal to raise the rate .50% and to further expand the base to include some services that have never been taxed before, including cable TV subscriptions, parking, management consulting services, travel services and debt collection services.

With all the recent activity in this area, staying on top of these changes has become more important than ever.  Oftentimes the person responsible for determining what is subject to sales tax and filing the necessary tax returns may not have the time or experience to do this.  Our webinar on Wednesday, July 8th will address these as well.

And let’s face it…it’s not exactly the easiest area of tax to understand.

But before we begin…What is Sales Tax and Use Tax?

Sales Tax – Tax on the sale at retail(end user) of tangible personal property(items that are visible and take up space) and certain taxable services.

Use Tax – Tax on the storing, using, consuming, and possibly distributing tangible personal property or providing a taxable service. Typically you will be subject to use tax in the state where that event occurs.  Use tax is considered a complementary tax.

Our Client Approach to Sales and Use Tax

As part of our tax services portfolio, we offer a comprehensive review of your sales and use tax procedures and tax returns in order to determine whether or not you may be overpaying or underpaying  We offer a 3 step process to help analyze your business and provide answers to your questions:

Initial Review

In our initial review stage, we gather information about how the sales and use process works at your business and determine whether or not additional time should be spent further investigating any possible overpayments.  Questions we look to answer include:

  • Which tax returns are being prepared and who prepares them?
  • How much sales or use tax are you paying?
  • What types of transactions are you paying sales and use tax on?
  • How comfortable is the return preparer with sales and use tax taxes and do they feel qualified to prepare the returns?
  • Are you familiar with all the possible exemptions to the tax that may apply to your industry?
  • Have you incorporated any recent law changes into your process?

Once we complete this stage, a decision is made on whether additional time should be spent investigating any potential issues.  Our experience shows that after this stage we often become aware of possible tax overpayments or underpayments that may exist.

Return and Process Review

Once we determine that a potential refund claim may exist or that there are areas of concern where there is underpayment, we move on to our return and process review stage.   Typically in this stage we look to accomplish the following:

  • Discuss the procedures being followed and determine any additional tax savings areas.  This typically includes a site tour and individual meetings with employees involved in the sales and use tax area.  We start with the purchasing manager and follow the chain all the way through the return preparer.
  • Review your sales and use returns in order to confirm information gathered in our client review stage and determine an initial projected refund.

Refund Claim Preparation

We use the results from the return and review process to support a claim for refund.  We will file the claim for you, document the adjustments, and manage the refund claim throughout the entire state review process.  Our experience with state tax agencies allows us to streamline the refund process and obtain the refund as quickly as possible.

Do You Need This Service?

Many factors contribute to the possibility of overpaying sales and use tax.  Some of the high risk factors include:

  •       Type of industry – Manufacturers by far have the highest risk of overpayment due to a lack of understanding of what areas of the business qualify for the manufacturing exemption.  Other high risk industries include construction and distribution.
  •       Personnel turnover
  •       Changes in the sales and use tax law
  •       Expansion of services or facilities
  •       Unfamiliarity with certain exemptions that may apply to your industry
  •       Vendor or supplier changes
  •       Business growth into another state

Benefits

The most immediate benefit from this service is the recovery of excess sales and use tax that was unnecessarily paid.   In addition, your personnel will benefit from the information gathered and be better equipped to prepare these returns in the future, keeping more of your money in your pocket.

Still have questions?  Join our webinar on Wednesday, July 8th at 1:30pm to see if our panel of experts can help in your situation.  Register Now!