Considering all the news and publicity surrounding federal tax reform in 2018, it is possible to have missed or simply overlooked the significance of the determination in South Dakota v. Wayfair on companies in the food industry. This case is specific to sales tax nexus and corresponding compliance repercussions. In short, Wayfair’s adoption of an “economic” standard and bright-line presence in a state necessary to subject an out-of-state company to its sales tax rules has far-reaching ramifications.
Prior to Wayfair, a company needed physical presence in a state in order for a state to constitutionally require a company to comply with its sales tax provisions. The physical presence rules remain in effect and will still generate nexus; however, Wayfair found that companies do not necessarily need a physical presence in a state to be subject to the state’s sales tax compliance requirements.
Based on the findings of Wayfair, a state that has adopted a Wayfair-type economic nexus standard may require any company that has $100,000 or more in sales or 200 or more transactions with customers in the state to comply with that state’s sales tax laws. For example, an out-of-state retailer shipping taxable products into California with greater than 200 transactions annually would be required to register in California and collect sales tax from California customers (ship-to address).
While Wayfair has received extensive coverage of its impact to e-commerce businesses and internet retailers, this decision does not simply apply to internet-only vendors. Wayfair will influence the food and beverage industry as well. Wayfair can apply to food companies that have customers located in states in which they do not presently have a physical presence and are not registered for sales tax.
Regardless, if the business has certain products that are not typically subject to sales tax, a registration and filing requirement may apply in new states. This would include registering as a vendor, collection of sales tax or exemptions and filing periodic (i.e., monthly, quarterly) sales tax returns with such states. A number of states have sales tax exemptions for food products and therefore it is important that a company understand the exemption rules in a particular states in order to determine whether they meet the requirements to file and collect under a Wayfair standard.
What should a company do in the post-Wayfair era?
State Tax Nexus and Taxability Review
We recommend reviewing the activity of your business and applicable sales tax nexus to identify if the company has sufficient sales or transactions in those states that have adopted Wayfair-type economic nexus provisions for sales tax. This is most efficient through an analysis of company sales-by-destination state compared to the states in which the company is presently filing sales tax returns. Additionally, we recommend reviewing the rules on the taxability of food and beverage products in each state that has adopted a Wayfair economic nexus provisions as a number of states may provide for sales tax exemptions for food and beverage products.
Depending on the results of a company’s nexus review, the company should consider whether to immediately register in the state as a sales tax vendor. This will be determined on a company- and state-specific basis, including an analysis of the effective date of each Wayfair state’s economic sales tax provision. For those Wayfair states whose effective date has passed, a company may wish to consider if such state has any leniency or special procedures to effect registration while limiting past liability (i.e., voluntary disclosure agreement).
A number of states have adopted provisions that establish their Wayfair effective date as of late 2018 or early 2019. For such states, companies should immediately review whether they have met the economic nexus threshold in such states. If they do have nexus in such state(s), the company should register and undertake the complex process involved with complying with such state’s sales tax provisions. Such companies should determine the taxability of all of its revenue streams as soon as possible.
Additionally, resale companies should identify if they are required to collect exemption certificates from their customers in specific states to exempt some or all of their sales. If necessary, a business should organize a process and begin collecting the appropriate exemptions (e.g., resale certificates) as soon as possible.
Use Tax Considerations
Consider a scenario where a company has been buying from various out-of-state vendors that were not previously required to charge it sales tax because such vendors did not have sales tax nexus in the company’s state, for example, California. Thus, the company has correctly been self-accruing use tax on purchases from out-of-state vendors. After the Wayfair ruling, some of these out-of-state vendors may now have sales tax nexus (i.e., over 200 transactions) in the company’s state and may start charging the company sales tax.
If the company’s use tax accrual procedure is determined based on the vendor and not on whether an invoice has sales tax charged, the company may be accruing use tax on purchases from such out-of-state vendors that are now charging sales tax. This may result in an over-accrual of use tax. Therefore, companies should also consider reviewing their use tax accrual procedures in light of the Wayfair decision.
With respect to sales tax nexus, companies should review their sales tax nexus footprint as soon as possible. This includes registration and filing for sales and use tax in various states, in addition to reviewing internal use tax accrual processes. If sales tax compliance is required going forward, we recommend understanding and addressing how the sales tax compliance burden will be handled, whether internal resources have the capacity and/or external resources are required. A food and beverage companies should promptly address issues with your tax advisors, such as GHJ’s Food and Beverage Team, or risk unwelcome tax exposure.