Major issues in a post-Wayfair world
The Supreme Court decision in Wayfair simplified some areas of taxation -- but also left a host of uncertainties in its wake.
Companies, especially middle-market and emerging businesses, have expressed concerns that such uncertainties will create unforeseen burdens, including systems, payroll, and other costs associated with monitoring new rules for multiple jurisdictions. In a recent Deloitte poll, 75 percent of respondents said they are very or somewhat concerned about what various states will do in response to the decision. Other findings from the poll include:
- “Taxability decisions” were cited by most respondents (32.4 percent) as their biggest compliance challenge now that Quill is overturned, followed by calculating and remitting sales tax (24.7 percent) and analyzing financial statement positions (6.5 percent).
- More than a third of respondents (37.6 percent) said their organization’s IT and tax departments are somewhat prepared to calculate, collect and remit sales tax, while 17.8 percent said they are not at all prepared.
The poll was tabulated according to responses from attendees at a Deloitte webcast on the Wayfair decision, with an average of more than 4,000 votes per question.
“We’re hopeful that states will be reasonable about companies getting up to speed on collecting,” said Valerie Dickerson, Deloitte’s national multistate tax leader. “States have to get ready, and some companies have to get ready if they’re not already collecting.”
“Larger companies with broader footprints throughout the U.S. are less likely to have been caught flatfooted by the decision,” she said. “Individuals out there selling through marketplace websites may be severely impacted and understand the least what is going to happen. They are the ones most hopeful that Congress will intervene.”
A potential administrative hurdle for states is the possibility of duplication, according to Dickerson. “There are some reports of double taxation where purchasers in a state should have already remitted use tax,” she said.
Reactions to the decision have gone one of two ways, according to Jeffrey Friedman, a partner in the Washington office of Eversheds Sutherland, and formerly a partner at KPMG’s Washington national tax practice.
“Some are calling for a waiting period to let the states settle the issues on their own. Others say there is a need for federal guardrails because the Supreme Court didn’t do a good job of getting a new standard to apply,” he said. “They would like Congress to step in and provide some predictability of how far the states can extend their taxing jurisdiction. In effect, the court took away the previous standard but left us wondering what the new standard will be, or if there will be a new standard.”
Friedman doesn’t believe congressional action is an immediate likelihood.
“There doesn’t seem to be a groundswell of energy to do something right away,” he said. “There seems to be a desire to let everyone adjust to what the court did and see if there’s any overreach by the states. So in the short term, six to 12 months, we don’t expect to see any federal action. But in the longer term, the chances increase, due to the likelihood that some states may go over the line of what is reasonable.”
“Congress should be encouraged to continue to monitor state and taxpayer reactions to Wayfair, “he said. “The possibility of retroactive application of the decision, and the question of how far the states will attempt to extend their reach, are issues that will generate calls for congressional action.”
Meanwhile, although state sales tax was the focus of the decision, Wayfair might also have a far-reaching impact on state income tax obligations, according to Marvin Kirsner, a shareholder at 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,” said Kirsner.
“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 there if it reaches a minimum sales threshold to customers in the state, even if the company does not have a physical presence there. In several cases these laws have been on the books for many years. It is possible that some companies that met these thresholds nevertheless did not file income tax returns on the basis that they did not have a physical presence there, Kirsner noted.
“Because the Supreme Court held in Wayfair that its prior precedents requiring a physical presence were wrongly decided and the court did not limit its holding prospectively, some of these states might say that companies who 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 said. “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.”