Sales Tax Due Diligence in a Post Wayfair World

Chris Vignone

Managing Director, Indirect Tax

Over the past five years, sales tax awareness has increased amongst the private equity world as states have expanded their ability to tax remote sellers through economic and marketplace nexus rules. However, as a result of the South Dakota v. Wayfair, sales tax has worked its way to the top of the due diligence list.

In fact, the enforcement dates for many states began as early as July 1, 2018, resulting in any deal currently in the pipeline potentially facing major sales tax exposure that may affect your ASC 452 accrual – and as a result, directly impacting EBIDTA.

What is a Remote Seller Under Wayfair?

Many professionals are confused and have assumed that Wayfair only applies to e-commerce transactions. This is not the case. Although many states have not clarified the definition of a remote seller, several have, and the definition is broad as states will cast a wide net.

For example, Nebraska defines remote sellers as “retailers that do not have a physical presence in Nebraska, but sales to purchasers in Nebraska” and Maryland defines a remote seller as anyone who “sells or delivers tangible personal property or a taxable service for use in Maryland”.

What is the Result of South Dakota v. Wayfair?

In 2018, the Supreme Court released its decision on the landmark sales tax case, South Dakota v. Wayfair. The Court overturned the “physical presence” standard that previously governed the determination of when sales tax was due. Wayfair held that the correct standard in determining the constitutionality of a state sales tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state.

State officials around the country continue to implement a range of possibilities for taxing sales by remote sellers to take advantage of the new economic Wayfair test, and the landscape is changing rapidly.

The Wayfair decision has made it critical for remote sellers to review their current business against existing and quickly evolving state legislation to make determinations as to which states they may now be required to collect and remit sales tax.

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