Wayfair Update: Dispelling Common Myths about State Tax Issues
posted Jul 9, 2019 by Paul Oliveira, CPA in the Global Tax Blog
In June 2018, the Supreme Court made a decision in the South Dakota v. Wayfair, Inc. et al case, affirming that the physical presence test under the 1992 Quill Corp. v. North Dakota decision no longer applies to the obligation to collect and remit sales tax on sales to customers in a state. Now that some time has passed, we’re here to dispel some common misconceptions about the ruling.
Myth #1: Nexus for sales and use tax collection requires physical presence:
Up until last year, when Wayfair was decided by the Supreme Court, you may have been able to argue that physical presence was required for Sales and Use tax collection. However, physical presence has NOT been a requirement for Income or franchise taxes since 1993. The decision in Geoffrey v South Carolina, subsequently followed by various other cases created a split in the nexus standards between sales and use tax versus income and franchise tax, by asserting that the physical presence test in Quill ONLY applied to sales and use tax cases. In effect, all Wayfair has done, is to bring these two tax regimes back in line with regard to Constitutional Nexus.
Myth #2: I only have subcontractors in the state, therefore I have no nexus.
You cannot change facts by throwing a new label on it. For example, if you are contracting someone to perform a function on your behalf, it’s the activity and not the relationship that establishes Nexus. This is also old law, and has been largely misunderstood since 1960.
Myth #3: I’m protected by P.L. 86-272, so I do not have nexus;
Nexus is a concept based on Constitutional limitations of Due Process and the Commerce Clause. P.L 86-272 is a Federal Legislative protection barring the State’s ability to impose an income based tax on an out of state seller given they meet certain restrictions. However, P.L 86-272 would not be needed if constitutional nexus did not already exist. For that reason, minimum taxes or fees, capital stock taxes, net worth taxes, gross receipts, and a plethora of other tax regimes, often found on the same filing or return as an income tax is still required to be filed or paid, even when P.L. 86-272 applies.
Myth #4: I have 100% ownership in multiple businesses with varying degrees of activity in several states, so activities of one won’t impact the others since there is no parent / subsidiary relationship:
The test in this case would be no different than if all the businesses were owned by a corporation as subsidiaries. The test is whether the businesses are discrete separate businesses or comprise a unitary business. For the latter, the activities of one business may establish nexus for the rest.
There are many more myths floating around the tax world regarding recent court decisions, sales thresholds, and other issues are being tossed around indiscriminately. So the real question you should ask yourself is “Did all these gross receipts (sales) really come from my home state? Or is it likely they came from many states? “
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