Challenges and opportunities remain five years after Wayfair and the 2017 tax reform legislation

May 11, 2023

Peter Michalowski
SALT Practice Leader, PwC US

I do not believe I have seen in my career any changes as momentous as the state tax impact of the US Supreme Court’s 2018 decision in Wayfair v. South Dakota and the 2017 federal enactment of the Tax Cuts and Jobs Act (TCJA). In the world of state and local tax, we see many developments each year, but these two events stand out by changing the landscape for taxpayers across industries.

The Wayfair decision didn’t just give rise to widespread adoption of remote seller nexus and marketplace facilitator collection requirements. It also resulted in a new framework where there are many sellers collecting tax and states are pushing to expand their collection requirements and their tax bases. New compliance responsibilities are accompanied by a focus on local tax compliance and sourcing—both challenging areas especially for sales of services, digital products, and software.

The TCJA prompted an initial flurry of activity around tax conformity matrices and fitting old state tax constructs into a new federal and international tax paradigm. This was followed by lengthy regulations on these new provisions and then amendments, including retroactive changes under the CARES Act. Now, businesses are dealing with expiring tax provisions, further changes such as the corporate book minimum tax, and the rollout of Pillar Two implementation. All of these significant developments and businesses’ responses to them continue to have a major impact on state taxation.

Five years after Wayfair and the TCJA, state tax professionals should be watchful, insightful, and resourceful. Certainly there are challenges but in meeting these challenges, savings and opportunities may be uncovered.

Watchful: Keeping alert to change

States have been revisiting their initial decisions on post-Wayfair nexus thresholds as well as providing guidance on their application, with implications for companies’ filing responsibilities. States also are providing guidance on issues such as sourcing, and localities are engaging in multijurisdictional discussions to centralize tax administration and compliance. Meanwhile, marketplace facilitator laws are evolving, with new taxes and fees covered, clarifications on the collection responsibilities between sellers and marketplaces, and potential new business arrangements becoming subject to marketplace facilitator requirements.

The TCJA enacted major modifications to the federal tax system, including the end of the worldwide with deferral regime for taxing foreign income. Many states have addressed conformity to these changes through legislation, while others have been providing guidance — and, in some cases, we are seeing litigation challenging the states’ application of these provisions.

Further, multiple TCJA provisions are coming into force or, in some cases, are expiring or phasing out. While Pillar Two has not been implemented in the United States (which instead has left GILTI unchanged and enacted the corporate book minimum tax), many nations are making commitments and following through on legislative proposals to enact these provisions.

We are seeing companies react to these changes in a variety of ways, with potential state tax consequences. In some cases, companies are considering restructuring, legal entity rationalization, and reevaluating tax attributes. In other cases, companies are revisiting their value chain, with resulting changes in intercompany relationships and transfer pricing consequences. Also, companies are analyzing characterization of income and expenses, which can result in tax accounting method changes. State tax professionals should be alert to these discussions and their organization’s plans and should seek to have a seat at the table when business decisions are being made to convey the potential state and local tax consequences.

Insightful: Finding meaning in data

These legislative changes, interpretations, and proposals require more than watchfulness. Companies should analyze how their business operations interact with these provisions to remain in compliance while potentially finding savings.

For sales and use taxes, responses to these developments include automation and analytics to provide control over transactional data and insights to identify trends. These insights often may lead to identifying overpayments, resulting in potential refunds and ongoing tax savings. Leading companies also are leveraging these gains throughout the indirect tax “life cycle”—including reconciliation and audit support.

For state income tax, the charge is much the same. It is important that as organizations push to the cloud, the state tax function is directly tied to ERP systems. Leading companies also are leveraging alternative technologies and developing enterprise-specific key performance indicators (KPIs) and dashboards. This allows tax departments to undertake real-time analytics and engage in dynamic modeling to understand risks and savings opportunities.

Resourceful: Doing more with less

Many companies are struggling in this complex tax and regulatory environment to maintain the necessary resources to meet these challenges. PwC has many tax managed service solutions to address areas such as sales and use tax, property tax, excise tax, VAT, and state income tax. These solutions provide access to resources, processes, and tools we’ve developed to help you address challenges in the post-Wayfair and post-TCJA environment and to help you to stay focused on your organization’s strategic priorities.

A focus area for indirect tax managed services is helping companies’ tax departments maintain their technological edge and apply those resources to new jurisdictions and business operations. This is important now that sales and use tax obligations have proliferated and VAT compliance and reporting requirements are evolving.

Whether a managed service, outsourcing, or co-sourcing model is appropriate for you, there are options to help with daily monitoring of state tax changes and/or adoption of a scalable and leveraged model for providing maintenance and change support. This also enables your tax department to focus on strategic decision-making instead of day-to-day operational tasks and special projects. It’s never been more important to be positioned to react quickly and decisively to state tax challenges with the ability to surge resources and deploy quickly on critical projects. We look forward to discussing these possibilities further in a future blog.

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