Wayfair Sales Tax Challenges Facing MHEDA Members

April 7, 2020

By Jim Margner, Tax Advisory Services, LLC

On June 21, 2018, the U.S. Supreme Court Wayfair decision changed the sales tax world forever. This decision has created many new state sales tax challenges for small and mid-sized businesses, including retail sellers and drop-shippers. Many MHEDA members may have been previously filing in only one state. Wayfair now requires a more detailed analysis of their sales activities in order to insure proper sales tax compliance and the avoidance of unwanted tax liabilities, interest and penalty assessments.

While this article cannot address every possible Wayfair issue, it will attempt to provide the reader with a discussion of sales tax issues in general and provide answers to questions recently posed by MHEDA members.

Before addressing these new Wayfair issues, a brief nexus review will follow:

Wayfair Expanded Nexus

Nexus means a definable degree of in-state activity that allows a state to impose its tax on sellers of either goods or services.

There are now two types of sales tax nexus espoused by the US Supreme Court that must be considered by sellers and drop-shippers:

1. Traditional “physical presence” nexus created by Quill in 1992
2. “Economic” nexus created by Wayfair in 2018

Prior to Wayfair, Quill required an out-of-state seller to have some degree of actual in-state “physical presence” before a state could impose its sales tax.

“Physical presence” usually meant property or people present in a state. “Property presence” can be established by an in-state business office (either owned or rented), or by having the seller’s inventory stored in a distributor’s warehouse or consigned at a customer’s in-state business location.

“People presence” could mean the in-state solicitation of customer sales orders performed by either company sales employees or by independent sales reps hired by the seller.

On the other hand, “economic nexus” is created when an out-of-state seller’s in-state sales merely exceeds a state’s threshold sales amount, either measured by annual sales amounts or sales transactions, without the seller conducting any in-state “physical presence” nexus creating activities. Such sellers are now known as “remote sellers”.

Product sales are sourced to the state where the products are shipped. This can differ from the customer billing address. Furthermore, each state has its own specific statutory economic nexus sales threshold, either an annual sales amount or quantity of sales transactions.

Hence, businesses previously making exempt interstate product sales, non-taxable sales, e.g., sales for resale, and sales to exempt organizations can now be affected by Wayfair’s new economic nexus criteria.

Before the Wayfair decision, sellers lacking physical presence were not obligated to charge state sales tax. Hence, Wayfair has dramatically expanded nexus to include many “remote sellers”. Remember, economic nexus applies to “retail sellers,” MHEDA distributor members, and “drop-shippers” MHEDA member’s suppliers alike.

A summary overview of these new consequences facing multi-state “retail sellers” and suppliers will be discussed below.

Retail Seller & Drop-shipper Economic Nexus Consequences

New challenges facing remote retail sellers include the following:

1. Making an analysis of each state’s annual sales based on product “ship to” destination and quantifying number of actual sales transactions per state
   1. Analyzing specific state economic nexus thresholds, each state has its own specific economic nexus thresholds, including effective dates
   1. Quantifying each state’s potential economic nexus commencement date
   1. Determining what is “taxable” as set forth on a customer’s sales invoice, e.g., delivery charges, installation, etc.
   1. Understanding each state’s tax registration and collection responsibilities
   1. Collecting proper customer exemption certificates, when applicable
   1. Implementing a multi-state sales tax compliance system or outsourcing the sales tax function to a third-party provider

Many remote sellers have only filed in one or a few states where they have business locations will face new multi-state sales tax responsibilities.

Retail sellers are usually responsible for customer sales tax issues. However, economic nexus has also created new responsibilities for drop-shippers that have been hired by retail sellers to make shipments into customer states. Some of the new potential sales tax responsibilities facing drop-shippers can include the following:

1. Having economic nexus in customer delivery states can expand the suppliers’ sales tax collection responsibilities
   1. Collecting exemption certificates from the retail seller will likely be expanded
      1. Collecting sales tax from the retail seller can result if exemption certificates cannot be collected from the retail seller

It is quite evident that economic nexus has greatly expanded the need for enhanced taxpayer vigilance and compliance. If economic nexus rules are not recognized and followed, the unwanted imposition of state sales tax can directly fall on the non-compliant remote seller or drop-shipper.

Remember, sales tax is the customer’s tax liability, and not the seller’s tax liability, but a seller having nexus in the customer’s state is obligated to collect tax from the customer, and remit that tax to the state.

A seller having nexus with the customer’s state who does not collect the sales tax from the customer, becomes primarily liable for the tax.

Corporate officers can be held as responsible parties and be personally liable to unpaid state sales taxes made by their companies.

Due Diligence Considerations

In addition, any non-compliance can affect a company’s potential selling price when that company is put up for sale. Unsuspected liabilities can reduce expected sales prices and complicate sales negotiations.

Buyers of companies should be aware of successor liability of the selling company’s unrecorded sales tax liabilities. A careful analysis can uncover these liabilities in either stock or asset transactions

In order to avoid these potential dilemmas, the following plan of action is suggested.

Economic Nexus Solution

Taxpayers engaged in multi-state business should adopt the following strategic plan in order to avoid unwanted state sales tax liabilities that were discussed above:

1. Have a thorough multi-state nexus review conducted, including both physical presence and economic nexus considerations
   1. Have a ‘taxability” review once state nexus has been ascertained
      1. Have an exposure analysis performed
         1. Determine a course of action, including remedial actions such as state Voluntary Disclosures
         1. Become registered for state sales tax, when appropriate
         1. Utilize internal multi-state tax software or hire a sales tax out-sourcing firm to handle future sales tax compliance

It is important to establish an economic nexus system that monitors both sales and sales transactions on an annual basis.

Conclusion

As you can see from the foregoing discussion, taxpayers should reassess their multi-state sales tax profile as soon as possible.

All states have enacted Wayfair economic nexus laws, except for Missouri and Florida. It is expected these two states will enact economic nexus statutes by mid- 2020.

Engaging an experienced multi-state sales tax advisor is the first step in developing a viable strategy that will minimize unwanted sales tax liabilities, interest, and penalties.

Developing a collaborative team approach with your state sales tax advisor can minimize Wayfair’s impact on your business as well as identifying potential tax reduction strategies.

In the spirit of authoring state tax articles for your membership publication, I am offering a FREE introductory discussion concerning the new Wayfair sales tax laws and how they can affect your business.

My contact information is:

 L. James Margner, MBA, CPA
Tax Advisory Services, LLC
312-636-1155    
jmargner@comcast.net