United States

Post-Wayfair misconceptions and technology companies

3 myths that could expose your technology business to tax risk

INSIGHT ARTICLE  | 

On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, overturning the long-standing physical presence nexus requirement established under Quill v. North Dakota, by permitting a new economic nexus standard for sales and use taxes. For all businesses selling goods or services across state lines—including those businesses in the technology industry—state sales tax compliance almost immediately became much more burdensome.

Additionally, the Wayfair decision led to several confusing misconceptions. The following article debunks and clarifies three misleading myths shared in a post-Wayfair world. New challenges exist for businesses, especially those in the software-as-a-service (SaaS), digital media, cloud computing and data processing sectors, and understanding these challenges could mean uncovering future tax risks and reducing the impact on the business.

Myth #1: New economic sales tax nexus laws will only apply to online retail sales.

Reality: Economic sales tax nexus laws apply to all remote sellers, not just online retailers. A remote seller generally includes any business that sells goods or services from one state to another, even if the seller has no physical presence or other connection with the state. For the states that have adopted new 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. An out-of-state technology business selling SaaS across state lines, may now have established an economic nexus and be subject to sales and use tax collection and filing requirements.

Myth #2: Technology companies are not affected by the Wayfair decision because their products and services are not subject to sales tax in most jurisdictions.

Reality: While it is commonly known that most jurisdictions impose sales tax upon sales of tangible personal property and certain services, determining what constitutes tangible personal property or a service, or identifying the taxability of services in each state can be a difficult exercise.  In many cases, software companies believe their products and services are not subject to sales tax based on their software delivery method, which is typically through electronic delivery, or because the company is located in a state that exempts software or SaaS from the sales and use tax. However, that belief is misplaced. Currently, over half of the states impose sales tax on prewritten software delivered electronically and almost two dozen states impose sales tax on access to prewritten software under a SaaS model.  In these states, the products sold by many technology companies are broadly subject to sales tax, and the list of states will likely increase post-Wayfair. Accordingly, the Wayfair decision will affect technology companies, and these businesses should be considering the implications of the new economic nexus standards.

Myth #3: Minimal compliance is sufficient for middle-market technology companies.

Reality: Because the Wayfair decision eliminates the physical presence standard and new economic sales tax nexus standards have relatively low thresholds on a per-state basis, such as requiring only $100,000 of sales or 200 transactions into a state, technology business may find their nexus footprints greatly expanded beyond where the business currently has property and personnel. Additionally, over two dozen states have enforced an economic sales tax nexus standard in the first five months after the decision. Given the pervasive nature of the new economic nexus standards, technology companies with minimal compliance will likely be at risk of noncompliance if no action is taken.

At a minimum, companies should undergo a sales and use tax process review or economic nexus evaluation to understand where sales may exceed new economic sales tax nexus standards. Once their nexus footprint is established, they can consider an automated sales tax solution, such as Avalara, Vertex or Thomson Reuters, in order to help maximize compliance. With over 10,000 different sales tax rates across state and local jurisdictions and various products and services subject to taxability rules by jurisdiction, proper compliance is difficult to maintain without an automated solution. These solutions help determine when to collect sales tax, self-assess any use tax obligations and apply the correct tax rate. In addition, automation provides enhanced reporting functionality that can simplify reporting, compliance and account reconciliations.

Finally, for technology companies eyeing and developing exit strategies, establishing proper compliance procedures is essential to avoid any unpleasant discoveries during tax due diligence. Sales and use tax liability is commonly the largest state tax exposure item that is identified during due diligence and can result in transaction disruption or delay.

With the Wayfair decision easing the states’ abilities to require sales tax collection, technology companies can mitigate risks and reduce the impact on the business by reviewing their sales and use tax processes and nexus footprint now.

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Steve Ingram  LinkedIn
National Technology Practice Leader

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