The Case Against Wayfair and How it Impacts Manufacturers

Economic Nexus

The Supreme Court issued a 5-4 decision in South Dakota vs. Wayfair, which overturned the “physical presence” standard for determining Sales Tax nexus.

Prior to the Wayfair decision, an out-of-state business selling products into a state was not liable to collect sales tax on sales made into the state unless they had a physical presence in the state.

The most common nexus triggers prior to Wayfair were having:

  • a physical location in the state (a store, warehouse or office)
  • an employee or representative in the state
  • a relation to an in-state affiliate

With the Wayfair decision, many states are now moving from a “physical presence” standard to a “substantial privilege” standard.   As a result, many states have now adopted economic thresholds in determining nexus.

In other words, a state may conclude that a business has obtained a “substantial privilege” of doing business in that state if:

  • the business has sales in excess of a certain dollar amount and/or
  • engage in a certain amount of transactions within that state

This means that a state can now assert nexus for remote sellers with no physical presence in the state and require them to collect sales tax on sales into the state.

To date, more than 30 states have enacted or announced some form of economic nexus rules.

What Does This Mean for Manufacturers?

Many manufacturers only have a “physical presence” in the state in which production occurs.

Their factory is located in that state, all products are delivered via common carrier, and they have no employees or representatives solicitating sales in any other state.

Prior to Wayfair, these manufacturers would only have nexus in that state. Therefore, they would only be required to collect sales tax on sales made to customers within that state.

After Wayfair, that same manufacturer could have nexus in multiple states and may be required to collect sales tax on sales made to out of state customers.

In Light of the Wayfair Decision, Manufacturers Should Consider the Following:

  • Conducting nexus studies in light of the new Wayfair standard;
  • Track which states have or will be implementing economic threshold standards;
  • Put in place procedures to ensure the collection of resale or exemption certificates;
  • Make tax determinations of products being sold in various states;
  • Registration requirements (even if non-taxable sales);
  • Put in place a risk and exposure analysis; and impact of use tax

How Can We Help?   

Our sales and use tax professionals possess a wide-range of backgrounds and work experience.   Our expertise allows us to provide practical advice and services tailored to each individual client.

Services

  • Audit Representation
  • Internal Sales & Use Tax Audits
  • Sales and Use Tax Nexus Reviews, Including Both Physical and Economic Nexus
  • Product and Service Taxability Review
  • Exemption Certificate Management
  • Voluntary & Amnesty Disclosure Agreements
  • Consulting, Research and Planning
  • Sales & Use Tax Training, Including QuickBooks Support

Mike Fralix, CPA, is a Tax Manager at Bowers & Company CPAs PLLC. Reach him at 315-234-1183 or mgf@bcpllc.com.

Bowers & Company CPAs aims to offer helpful information to our clients and friends. Learn more about how we can help should your business need accounting and financial services.

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