The U.S. Supreme Court's (the Court) decision in South Dakota v. Wayfair (Wayfair) permanently changed the retail and e-commerce environment. In Wayfair, the Court eliminated the long-standing sales and use tax physical presence nexus requirement; in part, by recognizing how different today’s marketplace is now than it was in 1992. The transition from physical to economic presence represents a seismic shift for how a business determines whether sales tax nexus is established, and is a real game-changer for all businesses making sales or purchases across state lines. Manufacturers and distributors however, are not immune from the decision simply because they sell for resale or are otherwise traditionally exempt from sales and use tax. These companies must also seek to adapt to a new sales tax environment.
Below are several common misconceptions of how the Wayfair decision affects manufacturers.
Myth: The Wayfair decision only affects online sellers.
Reality: While the focus of Wayfair has understandably targeted retailers and e-commerce companies, there is a significant impact to manufacturers and wholesalers. The following are just three considerations for manufacturers and distributors:
- Sales tax filing requirements: For the states that have adopted economic sales tax nexus provisions, the test to determine economic nexus is based on the sales revenue or number of transactions into the state, for example, $100,000 in sales or 200 separate transactions. Those economic nexus provisions typically do not address whether the sales, receipts, or revenue requirements include nontaxable or exempt sales. Until the states provide guidance on the inclusion of nontaxable sales, manufacturers and distributors should consider collecting resale or exemption certificates on qualifying sales. Additionally, those businesses may have a registration and filing compliance requirement, even if no sales tax is due on the transactions. For a manufacturer or distributor that typically does not file multistate sales tax returns, filing returns in potentially dozens of jurisdictions will create a new administrative burden and challenge for the tax department.
- Sales Tax Exemption Certificate Management: A sale is taxable unless the customer provides a properly completed tax exemption or resale certificate. For the manufacturer or distributor, that historically meant that they obtained the appropriate certificate in their home state. Because of economic sales tax nexus and the resulting state tax registrations, the manufacturer and distributor may need to obtain state-specific certificates for the new states registered because of economic nexus. This can be particularly challenging when the states do not have similar exemption certificate requirements, such as expiration dates for certificates or other compliance requirements.
- Accounts Payable: Most of the focus on economic nexus to date has been on the sales side, but economic nexus legislation could have a significant impact on the purchase side for a manufacturer or distributor. Suppliers will also be subject to these rules and will begin to charge sales tax on their invoices. Accounts payable personnel will need to be vigilant in determining if the sales tax is charged correctly and if it is not a taxable purchase, determine whether an exemption certificate or resale certificate should be provided to the vendor to exempt the sale.
Additionally, businesses that have historically accrued use tax based on purchases from frequently solicited remote vendors will need to be aware that those vendors may begin to charge sales tax. Procedures should be in place to mitigate any chance of double taxation.
Myth: The Wayfair decision does not have long-term consequences.
Reality: There are 46 jurisdictions that impose a general sales and use tax. After only 18 months, 43 of those states were enforcing a remote seller nexus provision through legislation, regulation or policy. States continue to provide guidance on these new provisions and continue to further amend these approaches. While South Dakota’s threshold is $100,000 in sales or 200 transactions, it is not a benchmark. Managing the changing rules across many jurisdictions is complicated, but it is necessary.
Myth: Companies do not need to do anything until all states have implemented their own economic sales tax nexus legislation.
Reality: Manufacturers need to understand their company’s position and implement a process that aligns with how Wayfair is changing the market. There is preventative maintenance that manufacturers can do now to help them in the future. Companies should consider three key items now:
- Length of time since nexus evaluation. If it has been awhile since the last nexus footprint evaluation, this is an excellent time to do so. Gain a thorough understanding of where you are currently filing sales and use tax returns. Evaluate sales and transactions by state and identify potential filing obligations post-Wayfair.
- State registration. Register in states where nexus requirements are met, so statute of limitations are not running.
- Understanding of state income taxes and gross receipts taxes. Almost all of the states impose an income tax and a handful of states impose gross receipts-based taxes. A few states have more recently adopted a sales threshold for the income tax because of the Wayfair decision.Historically, having some sort of physical presence served as the basis for nexus, even for some gross receipts taxes. Similarly, most gross receipts taxes were already based on an economic presence standard, but those with physical presence standards may become economic activity standards.
Understanding how nexus may affect manufacturers and distributors is extremely important. The nexus landscape is changing very quickly and multistate businesses with questions about compliance under the new nexus landscape should speak to their tax advisers on how to diligently track and comply with these new provisions.