Panelists: Michael Bernard, Nancy Manzano, Mark Sieczkowski
Date: Tuesday, November 6th, 2018
There’s never been a greater need for powerful, scalable and integrated tax data management capabilities.
While this is the case throughout the enterprise as digital transformation efforts advance, it is especially relevant to corporate tax functions within retail companies who are selling to U.S. customers following a momentous U.S. Supreme Court decision in June 2018.
The South Dakota v. Wayfair ruling allows U.S. states to require remote sellers to collect sales and use tax on transactions shipped into the state if certain economic nexus thresholds are met. Now that several months have passed, states are creating, finalizing and/or implementing online sales tax collection requirements that had either been in legal limbo or did not exist prior to the Court’s historic decision.
To answer SAP customer questions, a panel of experts from Vertex Inc.'s Chief Tax Office and Product Management joined this live Q&A and shared tips around the changing tax landscape, best practices on reducing compliance risk and the steps organizations need to be thinking about in order to reduce their risk.
Matthew Shea: Hello, and thanks for coming to today’s live Q&A on what the Wayfair sales tax ruling means for SAP customers. I am joined by a panel of experts from Vertex to answer your questions on the changing tax landscape, best practices on reducing compliance risk, and the steps organizations need to be thinking about to reduce their risk.
The panelists today are members of the Vertex Chief Tax Office and Product Management teams. Please welcome Michael Bernard, chief tax officer—transaction tax, Nancy Manzano, director in the chief tax office, and Mark Sieczkowski, senior product manager.
These answers are provided solely for educational purposes, without any warranty as to the accuracy or completeness of the information included in this presentation. These answers are not intended to and do not constitute tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on these answers.
To start out, the panelists will be answering a few questions about the Wayfair case. So what is the this case all about?
Nancy Manzano: On June 21, the Supreme Court overturned two previous rulings that created the standard that merchants are required to collect and remit sales tax only from customers in states where they have a physical presence. The Wayfair decision changed the physical presence standard to an economic presence standard. In other words, states can now require merchants to collect and remit sales tax even if they don’t have a physical presence in that state.
Most of the states that have economic nexus provisions in place today require collection and remittance only after the merchant passes a certain threshold of activity within the state. For example, the threshold rules in South Dakota are as follows:
Annual gross revenue of $100,000 from the sale of tangible property, electronic products, or services delivered into South Dakota; or
200 separate transactions per year in which there is a sale of tangible property, electronic products, or services delivered into South Dakota.
Matthew Shea: What is the overall impact of the Wayfair decision?
Nancy Manzano: Generally speaking, remote sellers are likely going to need to collect and remit sales tax in more states than they used to.
Comment From James R Madden, IBM: Please define economic nexus provisions.
Nancy Manzano: Economic nexus statutes that are put in place by a jurisdiction allow the jurisdiction to require sellers to collect and remit sales tax. Each state may have a unique statute, and many of them have thresholds that must be crossed before collection is required. For example, South Dakota has a $100,000 or 200-transaction threshold. Sellers that cross one of those thresholds are required to collect and remit sales tax there.
Comment From Justin: How do the thresholds operate once you get into local jurisdictions? Do you need to collect tax at the local level once you’ve past the state’s threshold?
Michael Bernard: For the most part, once you cross the state thresholds, you will need to also collect at the local level. Home rule states like Colorado and Louisiana are different; in those cases, you may have to meet the economic thresholds in that local jurisdiction before collecting and remitting.
Comment From Anne: Would businesses selling only exempt goods into a state have to register and file $0.00 returns in states where they meet the thresholds?
Mark Sieczkowski: If the selling of exempt goods into a state meets or exceeds the defined thresholds, a business would be required to register and file $0.00 returns in those states. If businesses are managing these sales via exemption certificates, they are required to manage those exemptions.
Comment From Ted: How does Wayfair affect businesses that provide only services — not necessarily only tangible personal property?
Michael Bernard: Wayfair impacts the remote sale of "services" only if those services are currently taxed in that state. Most states do not tax services. Pay particular attention to the sourcing of services. Generally, services are taxed in the jurisdiction in which they are consumed. For example, IT services may be performed in California, but actually consumed in South Dakota. Generally, the taxation would occur in South Dakota.
Comment From Alex: What are some of the details around how you calculate whether you’ve crossed the threshold?
Nancy Manzano: State economic nexus thresholds can vary. Differences include:
- The thresholds themselves — Most use a combination of a dollar amount and a number of transactions, but some use just one or the other.
- The measurement period — Some states are current calendar year, some are prior calendar year, and others use a 12-month rolling period.
- The transactions included — Some states include all gross sales, and some include only taxable sales. There are still unanswered questions about whether a seller with small-dollar or high- volume transactions should collect and remit.
Comment From Guest: We sell wholesale to retailers. Do we now have to track the sales by state, and if we meet a threshold, do we need to file even if we have no liability?
Mark Sieczkowski: If a business meets the nexus thresholds, regardless of whether sales are exempt or subject to tax, the business should register within that state. This ruling is applicable to all transactions regardless of the method of sale. Wholesalers may not be subject to collection and remittance requirements due to the nature of their business; however, they may have additional filing and reporting obligations.
Comment From James R Madden, IBM: In the case of Louisiana, there are state sales taxes, parish (county) taxes, municipality taxes, special taxing districts, and state exemptions from sales taxes at all levels with varying lengths of collection and escalating or descending rates with time. How does the Wayfair case address such a complicated tax scenario?
Michael Bernard: Your question suggests the difficulty of such states as Louisiana. I think you need to really see what type of guidance the parishes are giving. For now, I would say that once you pass the economic thresholds for state purposes, it would be the conservative position to collect for all sub-state jurisdictions.
Comment From Sandy: Define remote seller. Is it only from logging in to a website, or could it be a retail store advising the seller to drop-ship into another state?
Nancy Manzano: The term "remote seller" includes anyone who sells goods or services from a location that is not the jurisdiction in which the consumer is located. For example, website, catalog, and phone transactions would all be considered remote sales. The method of delivery is usually irrelevant.
Comment From Brian: How can Vertex help us meet the potential scale of new filing and remittance needs?
Mark Sieczkowski: Here are a few ways Vertex can help you:
- Vertex provides a host or products that can help you manage your end-to-end sales tax process — from calculation through return filing, with different deployment options to meet your business needs, including on premise, on demand, or cloud.
- Thanks to its team of tax researchers, Vertex has an unparalleled depth of knowledge.
- The Chief Tax Office — This is a group of deep subject matter experts in tax who are experienced tax leaders, educators, and trend followers who have their fingers on the pulse of what is happening in the tax world and what information and products our customers will need to respond to those changes.
Comment From Jeff: How likely is it that Congress is going to act on this?
Michael Bernard: At this point, it is very unlikely that Congress will step in and enact legislation that standardizes a nexus test (economic thresholds or physical presence) for all states. Congress had an opportunity to act for almost 26 years (since the Quill case), but it simply could not agree on a common test.
States have no incentive to seek federal legislation since they have won the Wayfair case. The President supports the Wayfair decision.
Comment From Andy: Is the negative here all the possible audits that could occur?
Nancy Manzano: Presumably, as merchants begin to collect, remit, and file in more jurisdictions, the follow-on impact would be more audits. Perhaps this is a good justification for increasing the tax department’s budget.
Comment From Dagmar: Is the first $100,000 of sales (or 200 transactions) tax-free each year?
Nancy Manzano: You should check when the state statute requires you to begin collection. Once you meet whatever the test is for that state, you should begin collecting at the beginning of the next filing period. For example, in South Dakota, you start collecting the year after you meet the economic thresholds. So if you meet the thresholds during calendar-year 2018, you must begin collecting and remitting in calendar-year 2019.
There are some states where economic threshold litigation is pending upon a final order in the Wayfair case. A final order may be coming in the next several months.
Also, some states have not enacted economic threshold legislation or have other nexus standards. You can expect a good deal of state legislative activity beginning in January 2019, when most state legislatures begin meeting again. Look for more states to enact economic legislation.
Comment From Andy: Does Vertex have a special integration into an SAP environment?
Mark Sieczkowski: Vertex is the leading SAP partner in the tax area since 1995 with over 1,000 mutual clients.
Vertex is a member of the SAP PartnerEdge open ecosystem and is an SAP OEM Partner.
Vertex offers certified tax interfaces for the United States and Canada.
Vertex has integrations that connect to the SAP ecosystem.
Comment From Liz: I’ve crossed the thresholds, and I’ve submitted a return. At the next tax period, I have zero transactions in that state. Do I still have to remit a return for that filing period?
Michael Bernard: We are seeing that a number of states do not want sellers filing zero activity (sales) returns. So check the regulations or guidance provided by a state. Some will require you to file a return, and others will not.
Comment From Denise: Does Vertex offer a service that we could outsource for the filing and payment? We are a small retailer.
Mark Sieczkowski: Vertex does offer services for filing and payment remittance. A business may leverage Vertex Cloud's Premium service for this purpose or leverage our Managed Services offering.
Comment From Paul: How many states have implemented legislation to address the new revenue possibilities with Wayfair? Do you anticipate that all will follow?
Nancy Manzano: Of the 45 states that impose sales tax, 22 of them have economic nexus rules currently in effect. There are several others whose laws will go into effect in the coming months — some with pending legislation or regulations, some that are waiting for their legislatures to reconvene next year, and a few that we have not heard from yet (for example, California and New York). We would expect that most states would have some form of economic nexus rules before too long.
Comment From Manny: We are an entity outside the US but have business-to-consumer (B2C) sales in the US. I assume we will be held to the same calculation and filing requirements? Are there any exceptions for foreign entities?
Mark Sieczkowski: If an inbound foreign seller is collecting tax, do you have to pay it?
Yes. Non-US sellers that sell into the US must collect and remit if they meet the economic thresholds. They are not exempt simply because they are a non-US seller. Most of these sellers are likely to sell on a marketplace.
If you are a foreign inbound seller, do you have to collect and remit?
Yes, if you meet the economic thresholds. The US treaty network does not prohibit states from requiring non-US sellers from collecting sales tax, because US bilateral treaties only apply to income tax.
Comment From Andy: Is there any talk or incentive for states to come to common regulations to promote trade?
Michael Bernard: At this point the states are focused on enforcing their economic threshold statutes. We are not seeing any discussions on standard thresholds.
Comment From Chris: If my business has nexus for sales tax purposes, does it now also have nexus for state income tax purposes?
Michael Bernard: There has been some commentary in recent months linking Wayfair to income tax. The Wayfair case only overturned the physical presence tests for sales and use tax collection and remittance. For income tax purposes, physical presence nexus is generally still the standard for businesses that sell tangible personal property. Those businesses are protected under the Federal Interstate Income Tax Law (PL 86-272) and would be subject to a state’s income tax only if they meet the four tests enumerated in the Complete Auto Transit case. Businesses that sell nontangible property or services could be considered to have nexus depending on the state statutes.
It should also be noted that PL-86-272 only applies to “income taxes or taxes based on income.” Several states have franchise taxes or gross receipts taxes that would not be covered by the protections under that statute.
Comment From Jackson: What should businesses be doing now?
- Prepare for increased collection and remittance responsibilities by:
- Starting to gather data on gross revenues and the number of transactions that occur within states where the company sells remotely.
- Prioritizing states where the company has the greatest economic presence and creating a plan to register to collect and remit sales tax (for example, via a marketplace or with a hosted or cloud-based technology solution).
- Evaluating the financial statement impact of remote seller compliance.
- Reviewing invoicing processes and controls because invoicing errors that occur after the decision is finalized likely will result in lower customer satisfaction and more cash flow risks.
Comment From Andy: Do break-points come into play in calculating tax, or is that just a point-of-sale (POS) type issue?
Mark Sieczkowski: Wayfair doesn't deal with how tax is calculated. The thresholds are established based on annual revenue from the sale of tangible property, electronic products or services delivered , or a number of separate transactions per year in which there is a sale of tangible property, electronic products, or services delivered.
Break-points do not impact the established thresholds.
Comment From Angela: Can states force sellers to retroactively collect prior to the Wayfair decision?
Nancy Manzano: Some states may try, but they are unlikely to prevail. As the case was being considered by the US Supreme Court, the 45 states that impose a sales tax filed a brief with the court pledging that they would not seek retroactive collection. Most have not set effective dates that pre-date the Wayfair decision. However, some states that already had economic nexus statutes in place are sticking to their own effective dates. Massachusetts is an example. Taxpayers should look carefully at each state’s rules to determine what their effective dates are.
Comment From Don: Does Vertex have relationships or work with some of the common eCommerce platforms?
Mark Sieczkowski: Vertex has over 120 integrations and works with many of the common eCommerce platforms, including SAP Hybris.
Comment From Kevin: How does Wayfair impact my Sarbanes-Oxley Act (SOX) testing?
Michael Bernard: If sales tax is already subject to SOX controls within your organization, then you will likely have more testing based on the states in which you do not collect and remit. If it is currently not subject to SOX controls, you should check with your internal or external auditors and determine if some testing needs to be implemented.
Comment From Ben: I understand there is a program known as Voluntary Disclosure Agreements (VDA). Can you provide information on that?
Michael Bernard: VDAs are voluntary filings that taxpayers enter into with state department of revenues. These VDAs are offered by states to incentivize taxpayers to become compliant and start remitting tax — particularly in situations where taxpayers should have previously been collecting and remitting. Most often states will waive any penalties if a taxpayer enters a VDA, yet some interest may still be owed. Your external CPAs or attorneys can assist in filing a VDA.
Comment From David: Where can I go to get the latest information on what the states are doing, rules, etc.? Is Vertex aggregating the information?
Nancy Manzano: Vertex has been tracking the states' responses since the decision. You can find that information at State Sales Tax Changes.
Comment From Mark: Now that the Wayfair case has been settled on remand and the respondents have agreed to collect and remit tax in South Dakota starting in January, does anything change?
Michael Bernard: No, even before the remand was settled, by virtue of the US Supreme Court ruling in Wayfair, economic nexus for sales tax collection became the law of the land. What the Court has left up to the states is how to put that standard into practice. If a state enacts similar economic thresholds to exempt small sellers, the state law will likely be in line with the Wayfair decision.
Comment From Tobias: What impact does the decision have on exemption certificates?
Mark Sieczkowski: For sellers, exemption certificates are still going to be very important to protect themselves from audit risk. In fact, sellers will likely need to collect and store even more exemption certificates than before since they will be filing in more states. The old paper method of gathering and storing exemption certificates may no longer be adequate in a post-Wayfair world. The Vertex Exemption Certificate Manager can help you collect, store, search, and report on exemption certificates with ease. The Exemption Certificate Wizard enables your customer to submit exemption certificates from your eCommerce site. Apply exemptions to sales and purchase transactions with confidence.
Comment From Ari: Won’t more of my suppliers now need to collect sales tax? Does that mean I won’t need to self-assess use tax anymore?
Nancy Manzano: As buyers of goods and services, businesses will also want to carefully analyze whether their use tax self-assessment procedures may need to be updated as a result of Wayfair. With more businesses collecting sales tax, it is quite possible that some suppliers that haven’t historically collected tax will now do so. Conducting a detailed review of the purchasing or use tax process could ensure that businesses don’t inadvertently pay use tax when they don’t need to.
Comment From Brittany: What do these economic nexus rules mean for the future of other nexus rules such as cookie nexus and other reporting requirements?
Michael Bernard: We would not expect the expanded physical nexus rules such as cookie nexus, click-through nexus, or notice and reporting rules to be taken off the books. States view these rules as an incentive for businesses to begin collecting sales tax on remote sales.
Matthew Shea: Thank you to everyone who joined today and asked a question. Thanks Nancy, Mark, and Mike for all your insightful answers. For further information on this topic, please visit Vertex's website: http://www.vertexinc.com
You may contact Vertex to see how they can support your corporate tax compliance needs by visiting https://www.vertexinc.com/contact-us.