Nexus in a post-Wayfair world
ARTICLE | January 10, 2021
Authored by RSM US LLP
On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, overturning the long-standing "physical presence” nexus standard established under Quill v. North Dakota in 1992. The result of the decision was that states could impose sales and use tax collection and remittance responsibilities on remote sellers based solely upon their economic presence or market activity in a state. In just under two years following the decision, almost every state has adopted and enforced a remote seller provision.
If you’ve been following this issue in the news, you may think that Wayfair only affects sales tax collection for online retailers selling televisions, furniture or exercise equipment—but that’s far from the case. The Court’s decision in Wayfair will have an impact on all remote sellers of goods and extends to those businesses providing services. Accordingly, the business and professional services industry must review the impact of the decision on the sale of their services in any state with an economic sales tax presence threshold. Additionally, business and professional services providers will need to reanalyze their state sales and use tax nexus footprint and previous nexus determinations, which may be out of date due to new nexus provisions. These businesses will now need to consider sales tax nexus just as any other traditional retailer would—a significant change in approach from the pre-Wayfair world.
Below are five considerations for business and professional services providers to consider when analyzing Wayfair
1. Does Wayfair affect business and professional services providers?
Yes. Wayfair has implications for all industries. Although most states impose a sales tax on the sale of tangible personal property and on specified enumerated services, at least seven states (Hawaii, Iowa, New Mexico, New York, South Dakota, Texas and West Virginia) generally impose a sales tax on broad categories of services, including various business and professional services. If a provider establishes a sales tax nexus under a state’s economic presence thresholds, the provider will need to determine taxability in the state, as not all states treat services alike. Importantly, if a business meets the new economic nexus standards in a state, registration, filing or other compliance obligations may be necessary, even if the business’s services are nontaxable in that state.
2. Will I need to register if my services are exempt everywhere?
Sales tax economic nexus provisions generally provide for economic activity thresholds without regard to the taxable or exempt nature of the sales or transactions. A business and professional services provider may need to register with the state, file “zero” returns or collect state-specific exemption certificates if the provider exceeds the thresholds to establish a sales tax nexus with the state.
3. Can you provide an example of how a service may be subject to tax in a post-Wayfair environment?
Yes—consider information services, management fees and software as a service (SaaS) platforms. Some states subject these services to sales tax and assign sales based on the location of the customer. Before Wayfair, in order to be subject to sales tax, the provider had to have established a physical presence in the state where the customer was located. A business and professional services provider that had sales in many states, but physical presence in only a few, may never have had to consider the taxability of its services.
After Wayfair, the sales tax nexus standard is now much lower, based solely on economic activity in a state. As such, it’s possible that a filing requirement may exist in states where customers are located—potentially many more states. Due to these new standards, a further analysis may be necessary to understand the taxability of services and location of customers to ensure there are no unexpected state tax assessments. A business and professional services provider must understand its revenue streams, where its sales are made and how a state treats the taxability of those sales.
4. Does Wayfair affect taxes other than sales and use taxes?
Yes. The ruling addressed sales tax and specifically whether a state can require an out-of-state seller to collect a sales and use tax when the seller lacked physical presence with the taxing jurisdiction. However, the physical presence standard has been reasoned to apply to other taxes too, including gross receipts and income taxes. To the extent that taxing authorities and taxpayers relied on the physical presence standard to impose non-sales and use taxes before Wayfair, states may begin to further expand their non-sales and use tax nexus under an economic activity test (much like the income tax factor presence, which has been enacted in almost a dozen states).
Beginning in 2019, a number of states adopted sales thresholds for non-sales and use taxes. Hawaii, Massachusetts, Pennsylvania, Texas and Washington all adopted new or revised sales thresholds for a non-sales and use tax purpose. Hawaii and Texas adopted the same threshold used for each state’s economic sales tax nexus determination for the corporate income tax and the franchise tax, respectively. Massachusetts and Pennsylvania both adopted a $500,000 threshold for the corporate income tax; Washington lowered its economic nexus threshold for the business and occupation tax to $100,000.
The takeaway? In the wake of Wayfair, states will continue to adopt more Wayfair-styled sales thresholds for non-sales and use tax purposes.
5. What should a business and professional services provider do now?
Business and professional service providers should review their state activity to determine where they currently have established a state tax nexus for all tax types. For sales and use tax purposes, this involves understanding the revenue streams and the total revenue and quantity of transactions from the prior 12 months in each state. Some businesses will need to consider automation or other technological solutions in order to accurately address increased sales tax compliance. Staying up-to-date with state developments is essential.
For non-sales and use tax purposes, it is still important to review apportionment methodology annually, as every year, more states enact single-sales factor and market-based sourcing (for apportionment purposes, this means sourcing sales based on the location of the taxpayer’s customer). New nexus standards coupled with market-based sourcing results in the potential for material apportionment or exposure to new states among business and professional service providers. Thus, it is critical to understand where the business has a filing requirement, since states could require that prior-year returns be filed from the date the nexus was established.
Finally, the business and professional services industry should review the impact of Wayfair and begin to ask questions such as:
- Do states where customers receive my services impose tax upon such services?
- How will those states that impose tax on business and professional services source the sales that my business conducts?
- How and when will the states that tax the services I provide require me to become registered as a result of Wayfair?
- Does my enterprise resource planning (ERP) system have the ability to distinguish between taxable and exempt services, customers and jurisdictions in order to know when to add tax on invoices to my customers?
- Does my company have the ability to remit taxes on returns on a timely monthly basis in all the jurisdictions that will follow Wayfair?
- Is my foreign business providing inbound services to U.S. customers also subject to Wayfair?
Understanding how a nexus may affect a business selling business and professional services is extremely important. The nexus landscape is changing quickly, so the business and professional services industry should be preparing like any other retailer post-Wayfair. Multistate providers with questions about compliance under the new nexus landscape should speak to their tax advisors on how to diligently track and comply with these new provisions.
This article was originally published Aug 23, 2018.
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This article was written by Tom Blaze, Mo Bell-Jacobs and originally appeared on Jan 10, 2021.
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