Are buying habits changing due to the Wayfair decision?
B2B businesses may shift to meet tax obligations and buyer needs
INSIGHT ARTICLE |
With the handing down of the South Dakota v. Wayfair decision, the U.S. Supreme Court has opened the door for the states to impose sales and use tax collection and remittance obligations on remote sellers based solely on a seller’s economic activity in a state. This decision has changed the landscape for both brick-and-mortar stores and online businesses and their customers. Previously, brick-and-mortar stores were essentially at a timing disadvantage compared to online retailers that did not collect sales tax from consumers at the time of purchase. Online retailers that had not established a physical presence could offer products free from sales tax, leaving consumers with a use tax liability—albeit a liability that was often not fulfilled. Now, after the Wayfair decision, consumers are more likely to pay similar total prices for products purchased from either brick-and-mortar and online retailers, finding that sales tax will be charged more often on internet and other remote purchases. Consumers may change purchasing habits when the upfront net sales price is no longer a factor between brick-and-mortar and online businesses. We explored this topic with Mo Bell-Jacobs, manager in RSM’s Washington National Tax office, to understand Wayfair’s impact on consumers and businesses.
How are online businesses reacting to the Wayfair decision?
Some large multistate retailers have already been collecting sales tax from their purchasers in all of the states they sell to, regardless of their physical presence and thus are largely unaffected by Wayfair. Other large multistate retailers will be able to easily adapt to collecting tax in additional states, already having the automation and compliance technology infrastructure in place. The Wayfair impact is really on smaller and middle market e-commerce and remote businesses that now are recognized in certain states as having economic presence, and thus a sales tax compliance obligation. Some of these businesses are facing tax compliance challenges and added associated costs while also trying to offer price-competitive products and remain profitable. At the same time, some small businesses could be exempt from state sales tax collection because they may not reach the mandated economic activity thresholds, for example 200 or more transactions or $100,000 of in-state sales. The bottom line is, because of Wayfair, businesses must identify and thoroughly understand the tax complexities of their economic sales tax nexus. State sales tax laws can vary significantly and legislation continues to evolve around these issues.
Could some consumers alter their buying habits as a result of Wayfair and sales tax changes?
Online marketplaces like popular e-commerce auction sites provide a platform to a large number of small retailers, sole proprietorships and individuals that sell their products through the marketplaces, often without collecting sales tax. Although purchases made without paying sales tax at the time of sale may still incur a use tax obligation, consumers may increase their use of these sites because they incorrectly assume “sales tax-free” means tax free. However, states are increasingly enacting legislation and regulation that obliges marketplaces to collect and remit sales taxes on behalf of the third-party seller. Marketplace third-party sellers may experience a benefit in the short term from a shift in consumer buying patterns to the marketplace rather than directly from the retailer, but that will likely be a short-lived, or minor impact.
How is Wayfair affecting business to business (B2B) companies and their online transactions?
Businesses tend to be quite loyal to their vendors once a relationship is forged. They are likely to stick to their long-standing sourcing and purchasing patterns. They know their vendors and have confidence in the quality of products they get from these businesses. The Wayfair decision may not have a huge impact in the B2B space in terms of changing buying patterns; however, there is a key concern that middle market businesses should be mindful of in this post-Wayfair marketplace; Due to the multistate complexities related to sales and use tax, some businesses may run the risk of double taxation in their B2B transactions (i.e., paying a sales tax and accruing a use tax on the same purchase). Additionally, businesses making exempt purchases may need to provide exemption certificates to vendors that they did not have to before. It is important for companies to carefully review their B2B sales and use tax obligations to address these concerns.
What should businesses do to address their evolving state sales and use tax concerns?
For starters, businesses should perform a nexus analysis to identify their current physical and economic nexus footprint and to fully understand the various state tax laws that apply. In addition, businesses may want to consider updating their sales and use tax automation solutions. Added sales tax obligations mean increased compliance needs and possible exposure to risks. In addition, businesses should examine their consumer engagement and pricing strategies to make sure they are aligned with consumer preferences and needs. In the scramble to address the changing sales tax environment, do not forget customers, as long-time purchasers may be surprised with price increases solely due to a sales tax being charged for the first time. Pricing changes should be communicated, along with emphasizing brand promises and value. And, finally, stay on top of the evolving news around the Wayfair legislation to remain proactive with ongoing tax changes.