Multistate Sales & Use Tax Update: Wayfair Financial Statement Surprises
Monday, December 2, 2019
Posted by: Abbey Kwiat
Malcolm Ellerbe, Alex Thacher, armanino
Thanks to the recent U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., sellers of taxable property or services may have additional sales tax collection obligations.
New Sales Tax Collection Standard
In the wake of the Wayfair decision, many states have adopted economic nexus provisions requiring sellers that exceed a threshold of sales in their state (most commonly $100,000 or 200 transactions over the prior 12 months) to collect sales taxes, even if they do not have a physical presence in that state (the pre-Wayfair nexus standard).
Financial Statement Impact and Unexpected Surprises
This is a fundamental change in state and local taxation, and it requires taxpayers to conduct a state-by-state analysis to identify states where they now have a tax collection obligation. Many states’ economic nexus provisions have an effective date of January 2019, so time is of the essence for addressing and staying current on Wayfair legislative changes. Each month that taxpayers do not collect sales tax, they become liable for what would otherwise be a pass-through tax to their customers. These liabilities likely are “certain” and must be accrued in the financial statements pursuant to ASC 405 (Liabilities).
An equally troublesome fact pattern among taxpayers who have done the Wayfair threshold analysis is that they begin filing in the states where they meet the Wayfair sales thresholds, only to discover that they were soliciting sales or traveling to these states in prior years; thereby establishing a pre- Wayfair physical presence collection obligation, and an additional accrual pursuant to ASC 450 (Contingencies). Liabilities can be minimized through voluntary disclosure agreements with the states if addressed before Wayfair- compliant registration and filing in those states.
Furthermore, there are state income tax implications of Wayfair that also must be addressed and will be the subject of an upcoming Tax Alert.
Recommendation and Timing
If your business has not already performed a Wayfair nexus study and threshold analysis, we strongly recommend you do so immediately to evaluate your prior-period physical presence nexus, review the potential liabilities, lookback period, penalties and more, and determine the most beneficial next steps.
To evaluate the state tax impacts of Wayfair as it relates to your specific tax situation, or to request a Wayfair nexus analysis, contact: Malcolm Ellerbe, CPA and Alex Thacher, Partner-In-Charge.