Riding the Waves of Wayfair
On June 21, 2018, the U.S. Supreme Court ruled for the state in South Dakota v. Wayfair. Since that decision, more than 30 states, including New Jersey, have acted to impose some economic nexus standards upon sellers.
In its decision, the Court overturned prior decisions imposing the physical presence standard for sales tax nexus. It ruled that retailers would have to collect sales tax based on an economic nexus standard even in states where they have no physical presence. The Court also found out-of-state retailers that met thresholds provided in South Dakota’s law (over $100,000 of sales into South Dakota or 200 or more separate transactions for delivery into South Dakota) had substantial nexus with the state for purposes of the Commerce Clause of the U.S. Constitution.
Now is the time for businesses to determine the extent of Wayfair’s impact on their operations to help minimize unwanted tax-related surprises in the future.
What Now? A Wayfair Review Plan
While there is no one-size-fits-all method, a good first step would be for companies to examine where they may be required to register and collect tax, whether their sales are taxable and whether their existing tax compliance process can handle any increased requirements.
These steps could act as building blocks for a comprehensive sales/use tax review that would include the following:
- Review nexus footprint. Businesses should review states where their operations could create existing physical presence and affiliate activities to determine any potential prior-period gaps. Companies should also examine current and planned sales activity to determine whether economic nexus standards would be exceeded in states where the company isn’t currently collecting tax.
- Analyze taxability of sales. In states where it is determined that registration is required, businesses should evaluate their product and service offerings to determine the correct taxability. It’s also important to analyze whether sales invoices bundle taxable and exempt products and properly display tax calculations.
- Review technology needs. Companies should consider whether current systems properly track sales by jurisdiction, apply correct taxability determinations and calculate the appropriate tax. Also, organizations need to consider whether their systems can generate the documentation required to prepare sales tax returns and support potential future tax audits.
- Develop a compliance plan. Some businesses will see their compliance obligations expand, and they may need to register, collect tax, obtain exemption documentation (for exempt sales) and file returns in new states. Is the existing compliance framework up to the task? If not, additional personnel, tax compliance systems or outsourcing partnerships might be solutions.
- Consider sales implications. Companies should inform stakeholders outside the tax department of any potential changes. Customer-facing departments must be prepared to answer questions from customers regarding any new tax charges. In addition, invoicing requirements, systems upgrades and new tax registrations might affect billing, IT, marketing and legal departments.
- Consider purchasing implications. Businesses might see more vendors charge sales tax on their purchases. If so, systems must ensure that use tax is not remitted when sales tax is collected and sales tax is not charged on exempt purchases.
- Stay current on changes. Wayfair will bring about changes to tax policy in many states. Companies will need to monitor future law changes, product taxability, tax rates, filing requirements and more in new and existing jurisdictions.
Wayfair in New Jersey
In response to Wayfair, on Oct. 4, 2018, New Jersey Governor Phil Murphy signed a law changing the sales tax collection standards. Effective Nov. 1, 2018, the law establishes an economic nexus standard similar to South Dakota’s and extends a sales tax collection responsibility to marketplace facilitators.
New Jersey now requires out-of-state sellers to collect sales tax if either of the following criteria is met:
- Gross revenue from delivery of tangible personal property, a specified digital product or services into New Jersey in the calendar year in which a sale occurred or the prior calendar year exceeds $100,000; or
- The seller sold tangible personal property, a specified digital product or services for delivery into the state in 200 or more separate transactions during the calendar year in which a sale occurred or the prior calendar year.
For businesses subject to this new collection requirement, tax applies to sales following the effective date of the bill. New Jersey will not retroactively enforce the economic nexus standard.
The bill also requires marketplace facilitators (e.g., Etsy, eBay, Amazon Marketplace) to collect sales tax on any taxable sales delivered to a New Jersey purchaser. However, marketplace facilitators and sellers may contract with each other regarding tax collection. In addition, if a marketplace is audited regarding a specific transaction, generally the seller in that transaction may not also be audited.
The New Jersey Division of Taxation recommends that out-of-state sellers continue to monitor developments regarding registration and tax-collection requirements as additional information is be provided.
In the wake of Wayfair, businesses face a changing sales tax collection landscape. Several states, including New Jersey, are setting new standards for sales tax nexus. Companies now need to determine the impact of these changes to their tax compliance process, make changes where needed and keep a close watch on further developments.
These comments represent the views of the authors only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Andrew Steinhaus, CPA, is a state and local tax senior manager at KPMG LLP. He is a member of the NJCPA's State Taxation Interest Group and can be reached at email@example.com.
James A. Bartek
James A. Bartek, CPA, is a partner in the State and Local Tax Practice at Withum. He is a member of the NJCPA State Taxation Interest Group and the Department of Labor and Directors work groups.
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This article appeared in the January/February 2019 issue of New Jersey CPA magazine. Read the full issue.