Hardwood Floors December 2018/January 2019

BUSINESS BEST PRACTICES TAX UPDATE

How the U.S. Supreme Court ‘Wayfair’ Ruling Affects You BY Mary Jane Pieroni & Stephen J. Lenivy On June 21, 2018, the U.S. Supreme Court issued what was likely its most significant state tax decision in more than 50 years. The ruling, South Dakota v. Wayfair (referred to as “Wayfair” ), holds that states may require a business to collect and remit sales and use taxes even if the business does not have a physical presence in the taxing state.

Does Wayfair impact only online website transactions? No, all remote sellers who ship or deliver goods or services across state lines may be impacted by Wayfair . In light of Wayfair , will drop shippers (wholesalers) still be potentially required to administer sales tax in certain states? Yes, wholesalers may be required to administer sales taxes on sales shipped or delivered to a state where the wholesaler has nexus (physical or economic) if the wholesaler does not collect a valid resale certificate from the retailer. However, we anticipate that in light of Wayfair , more remote sellers will register for sales/ use taxes and, as such, wholesalers may be able to more easily collect a valid resale certificate from their customer, the retailer, who directs them to drop ship goods to the retailer’s customer. Wholesalers may now also incur business taxes in states where they have an economic nexus only. Some states sales/use tax laws do not impose a filing requirement if a seller is not making “retail sales of tangible

WHAT DOES THIS MEAN? Bottom line: Consumers can expect to pay sales tax on many of their out-of-state online purchases. But it has significantly broader implications for companies selling in multiple states. Many states will now require businesses to charge and remit sales and use taxes based on an economic presence within their state, a concept referred to as “economic presence nexus.” (Previously, physical presence was required.) Businesses that don’t comply with the states’ economic presence nexus rules will be liable for the sales tax they should have charged their customers and remitted, plus interest and penalties. The ruling also means that states may subject out-of-state businesses with an economic presence in their state to pay income taxes on income generated within the state. “ Wayfair is a ‘game changer’ that dramatically increases the number of states where businesses will be subject to state taxes,” says BDO Partner Rocky Cummings. “Companies that fail to comply in states with economic nexus provisions will be exposed to potentially significant tax, interest, and penalties.”

COMMONLY ASKED QUESTIONS Do the “physical presence” rules still apply? Yes, sellers should evaluate their sales/ use tax administration responsibilities under both the new economic nexus thresholds and the long-standing “physical presence” standards. For example, a seller may lack an economic nexus by reason of having sales and transaction volume below the state’s statutory thresholds, yet be required to administer sales/use tax by reason of having an in-state physical presence. Sellers should note that physical presence nexus over the years has grown to include not only in-state employees (including nonresident/visiting) and property, but nexus may also exist through the activities of affiliates, “click- through,” “cookie,” and most recently marketplace facilitator nexus. Please note that traditional physical presence nexus rules should still be monitored. Of course, if a state has enacted an additional economic nexus rule, then a company should monitor its sales and transaction volume to see if the economic nexus thresholds have been reached.

the magazine of the national wood flooring association

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