By now, most businesses have heard of, or even experienced firsthand, the implications of the US Supreme Court’s ruling in South Dakota v Wayfair. The challenge for many businesses in trying to comply with these Wayfair laws is understanding the varying state provisions. This lack of uniformity creates confusion for many taxpayers, particularly consumer product wholesalers.
Highlights From the Wayfair Law
The Court, in its decision, provided states with the ability to impose their sales tax laws on out-of-state taxpayers, even if the business does not have an in-state physical presence. Once a remote seller’s in-state activity exceeds certain thresholds, the state can obligate the seller to collect and remit sales tax on its transactions. Notably, the Supreme Court’s decision did not specifically address what those threshold standards are. Currently, 42 of the 45 sales taxing states have released their own Wayfair provisions, with the lone holdouts being Florida and Missouri, and Kansas which is still trying to clarify its standards.
The different degrees of state thresholds means that there is no simple formula for taxpayers to follow in order to comply with the Wayfair laws. For example, California has a $500,000 sales threshold, Massachusetts's is $100,000 and New York requires $500,000 of sales and 100 separate transactions. While this is difficult enough to contend with, the problem is compounded when determining what type of sales are included for purposes of the thresholds. Is it retail sales only to end consumers, whether or not they are taxable items? Is it strictly sales of property that is in fact taxable? Or should gross sales to any in-state customer be used? Unfortunately, there is no uniformity among the states. For example, Connecticut uses gross sales, Illinois references retail sales and Oklahoma focuses on taxable sales.
Impact of Wayfair Laws on Your Wholesaler Business
Pre-Wayfair, wholesalers by and large had little to no sales tax exposure. First, wholesalers only had sales tax nexus in those limited number of states where they had a physical presence, such as an office, inventory or distribution center. Second, sales taxes are only due on the final sale of a product to the ultimate customer. Since sales by wholesalers are generally to distributors or retailers, they are not taxable sales. Post-Wayfair, however, wholesalers need to be more attentive to their sales tax compliance obligations.
Currently, about 30 state Wayfair provisions define sales for purposes of their respective threshold as “gross” sales. This means that even if a remote seller’s transactions are not necessarily comprised of taxable property, once its sales exceed the threshold it will have a sales tax compliance obligation. As applied to a wholesaler, for example, when annual gross sales into Nebraska pass $100,000 the wholesaler will establish sales tax nexus with the state, necessitating a tax return filing. Accordingly, when previously the wholesaler did not have a tax nexus with the state, it now may be obligated to file sales tax returns thanks to the Wayfair nexus standards.
Reducing Your Tax Exposure with Exemption Certificates
Although wholesalers could have sales tax nexus in various states due to Wayfair, they can reduce their tax exposure by collecting and retaining exemption certificates from their customers. To document the fact that a wholesaler’s transactions are exempt from tax, a wholesaler is responsible to obtain an exemption certificate from the purchaser, typically in the form of a resale certificate. Resale exemptions allow customers to acquire property tax-free if it will later be resold. When gathering resale certificates from customers, wholesalers must maintain a file of all properly completed and valid certificates. Once satisfied that all the requirements for accepting a resale certificate have been met, a wholesaler can apply the resale exemption to the customer’s order. Consequently, while a wholesaler may have Wayfair sales tax nexus in a particular state, it might only need to file a zero tax due return if it is compliant with the state’s exemption rules.
The Ongoing Challenge
For wholesalers, the Wayfair decision has widespread impact. Not only do wholesalers have sales tax nexus in many more jurisdictions thereby possibly necessitating additional return filings, but wholesalers also now need to step up their exemption certificate compliance to reduce their tax exposure. Many businesses are lax in requesting exemption certificates from their customers. State taxing authorities are aware of this and are assessing tax on wholesalers who do not have proper exemption documentation in their records. The end result is sizable sales tax, interest and penalties assessments on wholesalers who should never be on the hook for the tax in the first place.
Building a Defense
As Wayfair rules wreak havoc on out-of-state businesses, wholesalers can take certain steps to protect themselves in case of a future tax examination:
- Understand where you have sales tax nexus under both physical presence and Wayfair standards;
- Collect, review and retain sales tax exemption certificates for all nontaxable sales and exempt customers; and
- Proactively consider filing sales tax returns, even if no tax is due, to preempt noncompliance penalties and, more importantly, to get the statute of limitation running thereby reducing the periods that can be audited.
As states begin to enforce their Wayfair regulations, the need for wholesalers to get their sales tax controls in order becomes paramount. If you have questions regarding the effect of the Wayfair decision on your business, please contact Alan Goldenberg, Principal State and Local Taxation and Tax Controversy, at 212-897-6421 or via email at firstname.lastname@example.org, or your Friedman tax advisor.