Unique tax challenges face nonprofits after Wayfair decision

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October 2018

Overview

In a 5-4 decision, the US Supreme Court overruled prior Court decisions that had precluded states from imposing a sales and use tax collection obligation on sellers unless they had a physical presence in the state. [South Dakota v. Wayfair, Inc. et al. No. 17-494]

Constitutional nexus standards provide that a state tax can apply only to an activity with a ‘substantial nexus’ with the state. In Wayfair, the Court concluded that nexus is ‘clearly sufficient’ where South Dakota imposed a sales tax collection and remittance requirement on a seller that, on an annual basis, (1) delivers more than $100,000 of goods or services into the state or (2) engages in 200 or more separate transactions for the delivery of goods or services into the state.

The case was remanded to the South Dakota Supreme Court for further proceedings, which could address the application of other Commerce Clause arguments challenging the constitutionality of the state’s law.

Many open questions and considerations remain following the Wayfair decision, including the potential impacts on nonprofit organizations.

The takeaway

The Wayfair decision is expected to increase state nexus expansion efforts, and sellers with no in-state physical presence will need to analyze its impact. The number of states where companies must collect and remit sales and use tax likely will increase. Accordingly, nonprofit organizations should understand what goods and services are taxable in the new filing jurisdictions and implement procedures to manage the increased number of filings. Immediate consideration should be given to states with existing economic nexus laws that may seek to enforce such laws.

Other key considerations resulting from Wayfair include the following:

  • Nexus and ASC 450 considerations – Nonprofit organizations should reevaluate where they collect and remit taxes based on the new nexus standard established by Wayfair and then determine the impact on their ASC 450 reserve for indirect taxes.
  • Taxability of products and services for sales tax – Tax exempt organizations should determine the taxability of products and services in the new jurisdictions where they will be required to file. Nonprofits engaging in teleservices, Internet, and cloud-based transactions may face additional challenges in determining the taxability their products, as many states have limited guidance on these types of sales.
  • Voluntary Disclosure Agreements and amnesty programs ─ Participation in VDA and amnesty programs should be considered to the extent certain states may suggest retroactive application of expanded nexus standards.
  • Sales tax compliance – Many exempt organizations likely will have to file in more states as a result of the Wayfair These entities with taxable sales may consider automation solutions involving BOTs (software applications that run automated tasks), ETL (extract, transform, and load) tools, and other tools. Sales and use tax exemptions provided to nonprofit organizations may make automation more challenging than for for-profit companies, as a greater number of factors must be considered when determining the taxability of the sale or purchase and whether an exemption applies.
  • Indirect tax systems and engines – Is the information captured through e-commerce systems sufficient to determine how and where sales should be sourced?
  • Tax exemption documentation – Does the nonprofit entity have a process to acquire resale and exemption certificates? Will it need to initiate efforts to obtain certificates from customers in the new states? Companies may have to consider possible retroactive exposure for undocumented exempt sales in states where nexus now may be indicated. If nonprofits register in new states, does the state offer specific exemptions for such organizations? If so, is an application for exemption and regular renewal required? Further, does the state impose tax on unrelated business income?
  • Use tax accrual review – Post Wayfair, the use tax accrual process may change.
  • Income tax implications – Many of the same nexus/compliance considerations may arise to the extent taxpayers have relied on physical presence protections. Nonprofits with unrelated business income should consider these implications as well.

Contact us

Rob Friz

Health Services Tax Leader, PwC US

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