Wayfair Update: The Ongoing Impact

The U. S. Supreme Court ruling in South Dakota v. Wayfair, Inc. is now a few years old. This decision made it possible for states to mandate that companies without a physical presence in the state register to collect sales tax, and potentially file other taxes. How has this ruling impacted consumers, businesses, and state budgets? Articles abound on the impact of this decision. The articles may differ somewhat in direction and purpose, but they are generally consistent in the fact that Wayfair has made a huge impact on state tax collections.

The Wayfair decision in 2018, about a year and a half before Covid, could well have had an impact on how well states weathered the storm from a tax perspective. Although states clearly saw huge tax revenue drops in the first few months of Covid, the surge in on-line shopping coupled with states’ “Wayfair” thresholds that compelled more companies to collect sales tax in multiple states clearly sped up the recovery. Many states are now seeing tax collections at or above pre-Covid levels.

You may be asking “how does this impact my business?” Here are some considerations when deciding on a state tax direction for your company.

1. Prior to the Wayfair decision, individuals in most states with a sales tax would owe a compensating use tax on purchases made through the Internet when sales tax was not charged by the seller. Many individuals (and businesses) did not heed this legal requirement and states had few ways to enforce this obligation. This also created a decision-making process for some companies that might feel that “my competitor doesn’t charge tax on Internet sales so why should I?” After the Wayfair decision and the subsequent rush of “Wayfair” thresholds by the states (requiring companies with no physical presence to collect the tax), the playing field has been leveled somewhat as many more out-of-state sellers are now compelled to collect sales tax.
2. Physical presence nexus did not go away with the economic nexus thresholds of Wayfair. If your company previously created physical presence in a state (this does not have to be an office or a location-it can occur through slighter contacts), prior period clean-up may be necessary before registering for tax purposes on a go-forward basis in a state.
3. Marketplace facilitators (such as Amazon, Ebay, or Etsy) may be required to collect the tax on the sales that they facilitate, as many states have passed “marketplace facilitator” laws similar to Wayfair sales tax collection thresholds. If you are selling products through a marketplace facilitator, you should be aware that the facilitator may be required to collect the tax in the states where you sell.
4. Jumping to conclusions about taxability – Many companies in this service-based economy assume that no service is subject to sales tax – anywhere – and fail to register and report the correct taxes. Items such as remotely accessed software, digital goods (digital books, movies, or music for example), or other on-line products may be subject to tax.
5. One last point – when analyzing potential state tax filings, always look at all sales tax, gross receipts tax, or income tax filings that may be required on both state and local levels.

These are just a few of the many issues that must be analyzed on a state-by-state basis. It requires reviewing state law and regulations (both current and prior) and company activity in the state (current, prior, and future). If you need assistance with state tax planning please contact Rhonda Hampton, CPA at HHM CPAs at 423-702-7939.