Post-Wayfair Aftershock: The Need to Proactively Manage Increased Sales and Use Tax Risk
When Wayfair broadened the number of states in which businesses can have SUT liability (economic presence nexus), what it really did was increase dramatically the risks to businesses and their executives for tax noncompliance liability across the board on both:
- the business itself in the form of unbudgeted back taxes, penalties and interest on all open years on audit, as well as
- the key persons who run the business or who are responsible for signing tax returns and other documents in the form of criminal and civil breach of fiduciary responsibility.
The Wayfair “Effect” is Likely to be Contagious
Federal Tax Reform will significantly reduce tax revenues for many states by decreasing income tax rates and limiting state tax deductions for federal income tax returns (essentially forcing high-income individuals to leave high income states). States are desperate to recapture the significantly lost revenue. How will they do it? In addition to passing laws that impose Wayfair-like SUT rules, they will take advantage of Wayfair by significantly increasing audits wherever nexus gives them the “opportunity” to do so. And certain industries are more vulnerable than others.
Recent Example: Cannabis Store Owner
A recent article in Accounting Today highlighted the issue. The owner of a number of cannabis stores was convicted of failing to file income tax returns over a number of years, despite receiving professional advice over those years. Although Cannabis retailers, wholesalers, and growers have broad sales and excise tax obligations, this particular criminal case was about income tax violations. The person was a former member of the Oregon Liquor Control Commission’s Recreational Marijuana Technical Advisory Retail Subcommittee in 2018, who helped to advise the OLCC in adopting rules for the regulation of the industry. The case shows just how aggressive tax authorities are when it comes to going after businesses and individuals–especially in certain industries–no matter who it is and what the tax.
Getting Out in Front of Sales and Use Tax Risk
Wayfair’s expanded sales tax nexus reach is resulting in heightened civil and criminal risk and liability, as well as significantly enhanced audit activity—tax and legal– across the entire country by both federal and state authorities. This increased scrutiny and risk especially applies to industries and products that are more closely regulated, e.g., cannabis, alcohol, tobacco, etc.
As a result of the new Wayfair standard, these more closely scrutinized businesses will now have to register for sales tax in more states where they may have economic nexus. That means that such expanded jurisdictional reach will start first with sales and use tax audits, possibly expand to income tax and then get the attention of attorney generals for potential nontax statutory violations. Best practice is for businesses to register even in those states that haven’t yet imposed the Wayfair standards to get ahead of the curve as more and more states get more aggressive, especially against businesses and individuals in these industries.
Given that Wayfair will likely result first in sales and use tax audits, the first line of defense of the business should be to proactively take steps to reduce the sales tax risk first–both corporate and personally– by making sure that the technical and research solutions needed to keep the business sales tax compliant are in place. The sooner the better. Not only will it place the business in compliance but will show “good faith” to state attorneys general and others who will be alerted once a business registers in their state. With that in place, authorities may be put “more at ease” on other tax and nontax liability matters.
What to do?
So what should retailers do to get and stay compliant? Here are critical immediate steps which will reduce your business risk and help your Tax team be effective and efficient?
- Talk to your Sales Tax Team – This group has a unique view on your business. They understand or ought to the full scope of your product array, your sales and distribution channels and likely have an eye into new product introductions. Ask them:
- What are your biggest concerns for our business in the next 12 months in this economic nexus world?
- Do you have the tools and resources for us to get and stay compliant?
- Do we have a full grasp on our nexus profile in the post-Wayfair world?
- Invest resources and capital wisely – Depending on what answers your team provided, you may need to take multiple steps or just shore up some loose ends. Visit the Wolters Kluwer Sales Tax Nexus Resource Center to see which states have enacted economic nexus regulations and when they have/will begin collecting online sales tax.
Under Wayfair, the individual States have latitude on their particular thresholds and procedures. Getting and staying compliant will increase in difficulty and each day you wait creates more risk. Talk to one of our Sales Tax Consultants and we’ll help you/your team assess your situation and take the appropriate and practical next steps.