The Aftermath of Wayfair: Taxes Beyond Sales
In June of 2018, the US Supreme Court decided a case, South Dakota vs. Wayfair, Inc., commonly referred to as ‘the Wayfair case.’ The Court’s decision changed the rules that dictate when a taxing jurisdiction can expect a remote seller to collect and remit sales tax. The legislatures of the states, and some cities, have responded to the case by enacting economic nexus standards, which are now clearly enforceable for sales tax purposes. In addition, many taxing jurisdictions have also been emboldened to enact economic nexus standards, or simply enforce existing standards, that apply to other types of taxes: 1) gross receipts, 2) franchise, and 3) income taxes.
Manufacturers have unique concerns when it comes to these new standards as they often do not have a physical presence in all of the locations to which their products ship. By this definition, they qualify as remote sellers. The first concern involves recordkeeping. In order to determine if a remote seller has sufficient sales within a jurisdiction to meet an economic nexus standard, the sales must be properly summarized in the company’s records by the address the product was shipped to, rather than where the customer is billed. If your invoices often use the same information in the “bill to” and “ship to” fields (or don’t have separate fields at all), but you bill the customer headquarters for parts shipped all over the U.S., the “ship to” information will need to come from another source before economic nexus can be determined.
Another concern among manufacturers is increased scrutiny of their sales activity, especially if they sell via a third-party or company website. In the past, sales that did not create a tax obligation are now clearly able to do so, so the state breakdown for sales made through the website is necessary. It is critical that this information is accessible.
A final major concern for manufacturers is the resulting filing and tax obligations – given the increased scrutiny and exposure created by these remote sales activities. As a result of increased sales and use tax filing obligations, jurisdictions are likely to begin pursuing manufacturers for these other types of taxes (namely the gross receipts, franchise, and income taxes mentioned earlier). This could increase both the tax to be paid annually, as well as the cost of compliance, whether through internal tracking needs or through the cost of filing.
These are examples of the taxes for which we are already hearing from jurisdictions in regard to increased enforcement of economic nexus standards:
Texas imposes a franchise tax on the “taxable margin” – defined as gross receipts reduced by certain factors – of taxable entities that do business in the state. Until 2019, taxpayers were required to have a physical presence in Texas in order to be subject to this tax. That is no longer the case.
- Economic Nexus: $500,000 in Texas gross receipts.
Washington Business & Occupations (“B&O”) Tax
Washington imposes a business and occupation (B&O) tax on every person that has substantial nexus with the state for the privilege of engaging in business activities in the state.
- Economic Nexus: $100,000 in Washington gross receipts (slightly higher than this in prior years).
Oregon imposes a corporate activity tax (CAT) for the privilege of doing business in Oregon, effective as of January 1, 2020. The first estimated payment will be due April 30.
- Economic Nexus: $750,000 in Oregon gross receipts.
Philadelphia, PA BIRT:
Yes, even cities are enacting economic nexus. The Business Income & Receipts Tax (BIRT) applies to both gross receipts and net income.
- Economic Nexus: $100,000 in Philadelphia gross receipts.
Keep in mind, the historical protections from income taxes offered under Public Law 86-272 (“P.L. 86-272") do still exist when the activities within a jurisdiction are limited to the general solicitation of sales. However, the protection under P.L. 86-272 only applies to a specific list of protected activities by a seller of tangible personal property that otherwise has no other physical presence in the jurisdiction. Economic nexus can create a filing obligation but the income tax due will be zero, if P.L. 86-272 applies and is claimed on the return. It does not protect from the gross receipts or franchise taxes explained above.
The laws and regulations surrounding the Wayfair case and the resulting fallout are complex – VonLehman can help you navigate these complexities and understand the risks and implications to your business.
Contact our experts today:
Robin Teeters, State & Local Tax - firstname.lastname@example.org or 800.887.0437.
Victor Evans, Manufacturing & Distribution – email@example.com or 800.887.0437