How the Wayfair Decision and Sales Tax Nexus Will Impact Your Business
If you’ve ever received a speeding ticket, you understand have an appreciation for the enforcement of laws. The authorities set the rules, expectations are communicated, law breakers are cited, and then punishment is dispensed until compliance and order is achieved. It’s a simple, efficient system.
With the Wayfair decision in 2018, the Supreme Court changed the rules that determine nexus, one of the central principles of sales tax. With Wayfair, ecommerce activities can establish nexus. As a result, businesses are creating nexus with more authorities than ever.
Once a business establishes nexus with a tax authority, the business becomes connected to the tax authority (such as a state) and is obligated to follow their rules and regulations related to the collection of taxes. If the rules are not followed, the business can expect to be cited for failing to comply with the rules.
From a sales tax compliance perspective, 2020 is chaotic as businesses work to determine where they have obligations and authorities struggle to figure out the businesses that are obligated to comply with the new rules.
How will this chaos ever be sorted out? Not to worry, the sales tax police are coming to issue citations, punish the lawbreakers and restore order. If you want to avoid receiving a citation, simply understand and follow the new sales tax rules. And remember, when the sales tax police catch a business that is operating out of compliance, ‘you can’t make me’ is not a defense. But, we’ll get to that in a moment.
Wayfair Brought Change
Before Wayfair, understanding nexus was simpler. When a business established physical presence within a jurisdiction, nexus was established. If a business had stores, offices or employees within a state, that physical presence established nexus. Other activities established physical nexus as well, such as sales reps, inventory or delivery vehicles. Even attending trade shows or providing services could establish nexus.
To reflect the realities of ecommerce, the Supreme Court added economic presence as a condition for establishing nexus with the Wayfair decision. If a business simply conducts commerce within a state — even by ecommerce — the business can establish nexus with a tax authority. Ecommerce can include sales, click-throughs, attributions and online marketplace providers, depending on the authority.
But, there’s more.
The addition of economic activity as a means of establishing nexus has caused more businesses to establish nexus with more authorities. Recognizing that this might be a constraint to interstate commerce, authorities have implemented thresholds that businesses must achieve before nexus is created. Of course, states have varying threshold levels and can define activity in a different way. Also, some states are “home rule” states (California, for example) where local governments can establish their own tax rules and thresholds. The additional of thresholds requires tracking and adds an additional layer of compliance complexity beyond just identifying physical and economic presence.
Consider this map.
Where does your business do business? How is nexus for that state determined? What is the threshold for economic activity? Finally, does your business have nexus in that state and an obligation to collect or report? If so, is your business complying with the laws?
Visit the Sales Tax Nexus page for more resources.
The $2 Million Jeopardy Assessment
Of course, complying with the law is a choice. People drive over the speed limit all the time and deal with the consequences later. But, what could happen if you don’t collect and remit sales tax? What could a tax authority do to a scofflaw? As it turns out – yes, they indeed can make you comply.
Consider this recent example. One of our partners advised an East Coast retailer that had economic presence but not physical presence in a state adjacent to their home state. The advice was to comply with the law by collecting and remitting the taxes owed in the adjacent state. Fearing a competitive disadvantage, the client refused. Soon thereafter, the client received a Jeopardy Assessment from the adjacent state for $2 million, which was significantly more than what the business actually owed.
What is a Jeopardy Assessment?
Here’s how New Jersey explains it “If there is evidence that New Jersey tax is owed, our investigators may take immediate action to protect the State’s interests. This can include seizing assets under what is known as a Jeopardy Assessment.” A Jeopardy Assessment can be challenged, but not until the assessment is paid first. It might seem unfair, but what is the state to do? Again, from New Jersey: “What if You Disagree With the Jeopardy Assessment? First, you must immediately pay the warrant amount. Then you have 90 days from the date of the action to appeal the Jeopardy Assessment.” In this case, $2 million needed to be paid first before the retailer could initiate the appeal.
A Jeopardy Assessment may seem extreme, but for businesses that should know better and choose not to comply, it’s an option authorities use when other information does not exist. Audits and penalties are more common, which is especially unfortunate considering sales tax is an indirect tax owed by the purchaser, not the business. Why not comply from the start?
There is chaos today. But, eventually, the sales tax police will quell the chaos and businesses will come into compliance. We can help you to get there.
We Can Help
Want to know if your business is in compliance with the new economic nexus standards? Check out our Compliance Review Services and sign up today for a Sales Tax Compliance Review.
And don’t forget to sign up for our dispatch from the frontlines of Sales Tax by visiting TaxNA.WoltersKluwer.com/SalesTax for the most up-to-date news and trends.