What Does the Wayfair Decision Mean for Income Taxes?
Sales and use tax e-commerce considerations receive the bulk of attention from state lawmakers, perhaps because they are less difficult to conceptualize. The corporate income tax concerns raised by these transactions are just as pressing, if not more so, given the potential liabilities at stake.
There are two primary issues. First, does selling purely electronic products and services to customers in a state establish nexus (a sufficient connection to warrant imposition of tax) for an out-of-state company lacking any other contacts with the state? Second, if an out-of-state company does have nexus with the state, which pure e-commerce receipts are sourced to the state? In other words, how are these sales apportioned for purposes of computing the total income that the state can tax? These questions have many permutations and answers are often elusive.
E-commerce has precipitated enormous changes in the ways companies do business – changes that states’ corporate income tax laws did not anticipate and lawmakers did not foresee. Increasingly, companies engage in transactions with customers in a state while lacking any of the contacts traditionally associated with sales of goods or performance of services. Sales of products can involve downloads and streaming of items that cannot be touched or held; services can be performed remotely, rather than in proximity to the customer. These “pure e-commerce transactions” raise many corporate income tax issues that states are only beginning to consider, much less address. They include, just for example, sales of: music, video, and software downloads, remote access to software and apps, streaming games and entertainment, electronically provided information services, cloud computing services, digital storage, online education, and online research. New kinds of transactions are continually emerging, outpacing states’ ability to catch up. The first question to consider is nexus, or whether a state can and does assert jurisdiction to impose tax on a pure e-commerce seller, and, if so, whether federal law affords the seller any additional protections. In the wake of the Wayfair decision in favor of South Dakota, most states have already clarified the sales tax implications (and new filing requirements) for sales and use taxes. However, with this new ruling to use for support, many states are using this same stance for income tax filing requirements. That means, many businesses will have even more state filing obligations than they did just last year. This decision has added numerous more hours of tracking and reporting for business owners and their tax team.
Most states are still working on addressing all the questions and legislation to address our ever-changing digital and remote seller global landscape. Making sure your business is ahead of this wave of future potential litigation is key to your ongoing success. Keeping up on these changes are how our team can help yours. Our team at RPB can help make sure your business stays in compliance with all the changes before its too late.
Brad Voght is the tax partner at Reilly, Penner & Benton, LLP, a public accounting firm and trusted adviser specializing in business and personal tax matters as well as in not-for-profit work, school organizations as well as government and municipal agency work. The firm also provides ERISA audit services to publicly held entities throughout the country. A PCAOB registered firm, Reilly, Penner & Benton CPAs also known as RPB CPAs, has served closely held businesses and has provided tax preparation and advice, financial statement audits, reviews and compilations, employee benefit plan audits, bookkeeping services, business valuations, fraud prevention and consulting services since 1907.