5 sales tax lessons from the Wayfair case
Read time: 3 mins
What is commonly referred to as the “Wayfair case” (South Dakota vs. Wayfair, Inc. 2018) has dramatically altered the way sales tax is calculated in the United States, with far-reaching impact for businesses across the globe. Altering the definition of what makes a business liable to tax within each individual US state has significantly changed the financial responsibilities for tech businesses and eCommerce companies operating within the US from a remote location.
We spoke to BDO expert Tom Kivlehan to consider the new sales tax landscape and note the lessons learned…
How did the Wayfair case change sales tax?
Prior to the Wayfair case, liability to state taxes was dependent on “nexus” or a link to that particular state; this was assumed to be a physical presence. An office, warehouse or some other physical representation of the business would have to be present in that state for the business to be liable for sales tax. This was the rule of law for a number of years.
When the Wayfair case occurred, the state of play changed significantly. South Dakota opened a case against online retailer Wayfair, stating that as the company had what was called an “economic nexus” – or economic link to the state – the business was required to account for sales tax to that state. That could have been due to customers in that state, rather than having a physical presence.
‘It's a major change,’ explains Kivlehan. ‘Any business selling into the state has now got to figure out not just where they have physical offices or a physical establishment, but where they have customers, because that could make them liable to account for sales tax in a number of relevant states.’
It might be a particular shock to those businesses operating generally in the United States, but not in specific states. ‘Before they may not have had any sales tax liabilities. Now, they must register in the states where their sales or transaction numbers meet the threshold.’
Lesson 1: Regularly check your tax liabilities globally
Awareness of your ongoing, potentially changeable tax responsibilities is key. ‘Just because a company is not a US business in a particular state, that doesn't absolve them of the fact that they must pay state tax if they have customers in the US,’ Kivlehan warns. ‘Changes in tax are taking place worldwide; lots of jurisdictions are introducing taxes which may apply to non-residents if they are supplying services to people who are residents within that territory. It’s worth checking regularly to see if you should be accounting for a new tax liability.’
Lesson 2: Check granular variations of the law
The “economic nexus” situation is made more complex by state-to-state differences. ‘The US, particularly for tax purposes, is effectively 50 different jurisdictions,’ Kivlehan clarifies. ‘The entire process is complicated by the fact that each state interprets the law differently. Some states have a higher threshold before you must account for sales tax, or a variable date from which you must start accounting for sales tax. For businesses operating across a range of states, the law must be scrutinised on a state-by-state basis to ensure everything is by the book.'
Lesson 3: Make sure that your business accounts for the right period
With the inconsistency in the legal enforcement of this legislation, companies are advised to check exactly how far back they need to account.
There’s also the possibility that businesses might not need to take any action, as the new legislation’s mandates are already accounted for in current state law. ‘States such as Florida and Kansas are not enforcing the sales tax at the moment, likely because compliance is already in place from the existing tax legislation in those states,’ Kivlehan comments.
Lesson 4: Keep an eye on other areas of tax
The seismic change in sales tax law might have an impact on other laws down the line, as a change in the definition of a “nexus” might lead other laws to be altered.
‘Some of the states may use this case as an argument as to why local income tax also should potentially be due for businesses with an economic nexus,’ says Kivlehan. ‘I'm not a direct tax specialist, but you can see the logic.’
Lesson 5: Digital industries in particular need to remain aware
The fallout effect of the Wayfair case on the digital industry, particularly for eCommerce businesses, has been significant. ‘It's probably affecting digital businesses a lot more than companies in other sectors, because they are much more remote, and probably haven't thought about these sorts of issues,’ comments Kivlehan. ‘If you're supplying physical goods, either you would already have warehouses and establishments in the relevant places, or you would know where you are sending your goods.
" With eCommerce, it's now going to be a lot harder, because you've got to be able to identify where your customer is actually located, which can be difficult."
What the Wayfair case means for the future
The Wayfair case’s impact is just one example of how a simple change in what constitutes an operational location can affect a business’ financial prospects. As the world continues to become connected, other countries are likely to take an “economic nexus” approach, and businesses in the digital space will have to adapt quickly as legislation changes.
Want to know if your business might be affected by the Wayfair case, or have already seen first-hand how it has affected businesses? Let us know by emailing [email protected].