For those waiting for the dust to settle in the aftermath of the Supreme Court’s Wayfair decision, it hasn’t.
“We’ve been sending new alerts out almost on a daily basis as states provide guidance indicating how they’re going to proceed,” said Jeff Glickman, partner-in-charge of state and local tax services at Top 100 Firm Aprio. “About 20 states had enacted similar legislation to South Dakota’s leading up to the decisions. There has been a flurry of activity following the decision, as states begin the process of sorting out when and how they will enforce the new rules. Member states that signed the Streamlined Sales and Use Tax Agreement had a call in which they all agreed not to apply Wayfair on a retroactive basis.”
“Many states have already indicated that they’ll expect sellers to be set up and charging tax on sales as of Oct. 1, 2018, or Jan. 1, 2019,” said Val Dickerson, national multistate tax leader at Big Four firm Deloitte. “For some, this will present certain challenges, including registration, taxability decisions, sourcing, collection, remittance and the filing of returns, which is typically required to be done electronically. And there are some states that expect compliance to have begun by July 1, 2018, or even earlier.”
Interestingly, Glickman pointed out that three states said that although they have not passed legislation, they are going to apply and enforce what are effectively South Dakota-type laws against remote sellers selling into their states.
The threat of double taxation is not great, he noted: “The leakage you get is when consumers buy in an out-of-state store and bring an item back into their home state. They may owe an additional 1 percent if their home state has a higher rate.”
“States will not typically have the information or motivation to identify duplicate payments,” said Dickerson. “The responsibility really originates with the purchaser — to identify a duplicate payment in a timely fashion and file the appropriate refund claim.”
One area that isn’t entirely clear in the language of some state legislation is the way in which the threshold is calculated, according to Glickman: “The way the statutes are written, if you make sales into the state exceeding $100,000, does it matter if the sales are taxable or nontaxable in order to meet the threshold?”
For example, the Utah law, which passed last month, specifically applies to remote sellers who meet either of the following: “The seller receives gross revenue from the sale of tangible personal property, any product transferred electronically, or services for storage, use or consumption in the state of more than $100,000, or the seller sells tangible personal property, products transferred electronically, or services for storage, use or consumption in the state in 200 or more separate transactions.”
“These economic nexus thresholds can be met via sales of other than tangible personal property,” Glickman observed. “And the sales of tangible personal property, electronically transferred products, and services do not necessarily have to be taxable by the state. In other words, if I sell $100,000 of nontaxable services and then make one sale of taxable property for $50, do I have to collect sales tax on that first taxable sale? I think so.”
A damper on rate changes
The uncertainties of both the Wayfair decision and tax reform may be a reason for a decrease in state sales tax rate changes during the first half of 2018, according to Bernadette Pinamont, Vertex vice president of tax research. The “Vertex 2018 Mid-Year Sales Tax Rate Report” shows a decrease in rate changes compared to the same period in 2017.
“Between Wayfair and the Tax Cuts and Jobs Act, states may have been hitting the pause button to give themselves time to understand what they’re looking at,” said Pinamont. “Although tax rate changes decreased from previous years, it was still an extremely active and surprising six months as tax professionals began to watch and assess the implications of the decision,” she said.
“As a result of Wayfair, tax professionals are putting a greater focus on reviewing their end-to-end sales and use tax compliance processes, specifically registrations and exemption certificate management,” she said. “Wayfair is not only impacting their economic nexus, but is also prompting companies to discuss processes, staffing and technology resources needed for tax.”
From a professional liability standpoint, Wayfair presents two risks, according to Deb Rood, risk control consulting director for CNA, the carrier for the American Institute of CPAs’ professional liability insurance program: “One is the failure to advise. Right now, there are a bunch of uncertainties related to the issue. We know that physical presence is no longer the standard [for sales tax nexus], but we don’t know exactly what is the standard. CPAs are in an awkward situation where they don’t have anything definitive to tell their clients. When something definitive is determined, it’s going to take a while to catch up. You can foresee a client asserting that their CPA failed to tell them this was coming down the pike.”
“Once taxability is determined, I’m concerned that CPAs won’t understand that it applies to certain clients,” continued Rood. “The client will say, ‘You didn’t tell me I had to collect and remit in this state.’ I fully expect these types of claims. The penalties for failure to file are typically damages. It’s not unusual to have interest added, but in these cases the CPA could be liable for the tax itself, because if the CPA had told the client, the tax would have been borne by the client’s customer.”
There are certain things CPAs should do to mitigate the risk, according to Rood.
“Read Accounting Today and the AICPA literature on the issue, and determine how the ruling will affect the CPA firm’s clients,” she said. “Then look at your engagement letters, and make sure that they have a detailed scope of service. If the letter has the phrase ‘limited tax consulting,’ eliminate it, because a client could assert that by having that phrase in the letter, you had the responsibility to address the Wayfair decision and how it applies to them.”
“Keep in mind that ‘failure to advise’ is where a lot of claims will arise,” she explained. “If you’re just doing Form 1040 returns, you might not realize that the client is making sales over the internet, so send out a newsletter to all your clients. Inform them that they should contact you and set up an appointment to discuss how Wayfair might apply to them. And contact the client directly if you know they are affected.”
If the client is affected, they might look to the CPA firm to give software vendor recommendations, Rood observed. “If the vendor doesn’t work out, CPA firms have been sued. Refer more than one vendor, and tell the client, ‘They are all qualified but we don’t endorse any of them.’ And advise the client in writing as to their own due diligence to ensure the third party meets their needs.”
From sales to income
Meanwhile, Wayfair might have a far-reaching impact on state income tax obligations in addition to its sales tax impact, according to Marvin Kirsner, a shareholder at law firm Greenberg Traurig.
“The potential state income tax exposure is likely greater than sales tax, because so many states have had income tax nexus rules on the books for many years,” he said.
“If a physical presence is not required to come under a state’s sales tax jurisdiction, a physical presence likewise is not required to come within a state’s income tax jurisdiction,” he said. “This potentially has wider ramifications to businesses around the U.S. because it applies to any company doing business in a state, even if the company does not sell goods or services which are subject to sales tax — as is the case with financial institutions.”
Many states have enacted state income tax nexus rules that say that a company must file a return if it reaches a minimum sales threshold to customers in the state, even if the company does not have a physical presence there. Some companies that met these thresholds may not have filed income tax returns on the basis that they did not have a physical presence, Kirsner indicated.
“Some of these states might say that companies that met these sales thresholds should have filed returns going back to the date their income tax nexus laws were enacted — in some cases more than a decade ago,” he said. “As a result, depending on the state, the potential exposure could be material.”
“Companies with state income tax exposure as a result of the Wayfair case should consider a [voluntary disclosure agreement] with these states,” Kirsner added. “A company considering a VDA with a state should act quickly, because if the state tax agency contacts the company about why it has not filed a tax return before the company can make its initial VDA offer, it is usually too late to negotiate an agreement.”
