Column: South Dakota v. Wayfair --
Supreme Court Complicates Your State Tax Situation

      In June of 2018, the U.S. Supreme Court ruled in favor of the State of South Dakota in a case where the State sought to impose sales and use taxes on sellers located outside of the State.

      This decision fundamentally changed the State’s nexus standard, which previously required a company to have a physical presence in the State (i.e. office space, employees, personal property) for it to require businesses to collect and remit sales and use taxes.

      As a result of this decision, most other states have now adopted, or are in the process of adopting, this new “economic nexus” standard.

      While the issue in this case was sales and use taxes, this decision may also trigger other types of state and local taxes on businesses. This article will discuss its implications.

Impact on government contractors

      When Wayfair was first decided, everyone assumed this case only applied to online retailers. However, this is not the case. Government contractors who have sales in the following categories may now have nexus in states that previously it did not: • Performing services at a government facility; • Sale of tangible or intangible goods into other states; • Remote software sales, cloud-based products, and related services.

Current State Situation

      A number of states have now used the Wayfair decision to impose their income and other taxes on businesses that have no physical presence in the state.

      They assert that an out-of-state business has an income tax filing obligation in the state if the business revenue exceeds a certain threshold from customers in the state (the most typical threshold being $500,000, though many states utilize a threshold of $100,000).

      To date, the following states have adopted an economic nexus standard: AL, CA, CT, DC, GA, HI, IL, IN, IA, KY, ME, MD, MA, MI, MN, MS, NE, NV, NJ, NY, NC, ND, OH, OK, PA, RI, SC, SD, TN, UT, VT, WA, WV, WI and WY.

      The following states have either adopted or in the process of adopting this standard and will be implementing in the very near term: AZ, AR, CO, FL, ID, KS, LA, MO, NM, TX and VA.

What You Should Do

1. Review your current state nexus situation.

         First and foremost, you should assess where the company has a physical presence. This includes:

   • Owning, leasing, or renting real or personal property
   • Employing individuals

         You should already be registered and collecting/remitting sales tax as well as paying other state and local taxes and filing the necessary tax returns in these jurisdictions. If not, this should occur immediately.

         Secondly, you should determine those states where revenue is being derived for which no physical presence exists.

2. Register in those states that have adopted economic nexus.

         Compare those states you are deriving revenue from with no physical presence against the list of states that currently have adopted the economic nexus standards. You will be required to register in these states and begin collection/remittance of sales taxes (and possibly other taxes too). Remember that some states impose sales tax on services as well as sale of goods.

3. Back filings and remittance of taxes.

         The effective dates of these new provisions vary by state, many having implementation dates back in 2018. You may be required to prepare back filings for sales tax reporting as well as remit back taxes. You should look to enter into voluntary disclosure agreements with various states to potentially avoid the imposition of penalties on these back taxes.

4. Include sales and use tax in pricing.

      Be sure to inform those performing pricing within your organization of the new states that will require and sales and use tax to include these amounts in any bids to those states.

What to Expect

1. More audits.

         States have become more aggressive in their state tax audit function in their search for additional tax revenue. The Wayfair decision is seen as a means of collecting significant revenue in a short period of time.

2. States will use economic nexus to impose their business taxes to these out of state companies.

      This will be the next revenue grab for states.

      The Wayfair case has fundamentally changed the imposition of state sales and use tax, as well as other taxes are applied to business transactions and to the business itself. Most businesses are unaware of these new requirements. If you do not have the in-house expertise to wade through these new requirements, I strongly suggest you meet with your tax advisor.

Michael Smigocki, CPA, ABV is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached via email at MikeS@FedStrat.com.

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Column: South Dakota v Wayfair - Supreme Court Complicates Your State Tax Situation

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