associations, sales tax, and the wayfair case...quill corp. v. north dakota and natl. bellashess. v....

Associations, Sales Tax, and the Wayfair Case

PRESENTED BY COHNREZNICK, LLP

MAY 22, 2019

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASE

◦Presented by CohnReznick, LLP

Janene Mitchell, CPA Wendy Zee Galex, JD, LLMSenior Manager, Not-For-Profit and Education Practice Manager, State & Local Tax [email protected] [email protected]

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mailto:[email protected]




AGENDA• Sales & Use Tax Considerations

• NEXUS for Sales & Use Tax – Wayfair

• Effects on Financial Reporting

• Questions & Answers

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASE SALES AND USE TAX CONSIDERATIONS

COMMON MISCONCEPTIONSMisconception #1

“I am a Not-For-Profit, therefore I do not need to pay sales tax on my purchases!”

Misconception #2

“I am a Not-For-Profit therefore, I do not need to collect sales tax on my sales!”

Misconception #3

“I don’t have offices in other states and only sell on-line, so not applicable!”

Misconception #4

“Exemption status is automatically granted at the State level because it was granted at the Federal level!”

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SALES AND USE TAXSales Tax:

• A tax which is levied by a State on the retail sale of tangible personal property and enumerated services

Use Tax:

• Complimentary to sales tax

• The tax which a purchaser must accrue and remit to the State upon the retail purchase of taxable tangible personal property or services when the retailer did not collect the sales tax due

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NOT-FOR-PROFIT PURCHASES

• A qualified Not-for-Profit can make qualified exempt purchases

• Non-qualified Not-for-Profit Organizations/Trade Associations are required to either pay sales tax or self-assess use tax on taxable retail transactions

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASE NEXUS FOR SALES & USE TAX - WAYFAIR

WHAT IS NEXUS?•Generally, the minimum contact(s) that an entity must have with a state for the entity to be subject to the state’s tax jurisdiction.

•The United States Constitution imposes two significant restrictions on a state's ability to establish nexus with an out of state company and they are the following:

Due process clause = minimum connection

Commerce clause = substantial presence

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASENEXUS FOR SALES & USE TAX - WAYFAIR

HISTORICAL NEXUSPrior to Wayfair, nexus was established by the following methods:

• Physical Presence

• Agency / Affiliate Nexus

• Click-through Nexus

• Marketplace Facilitator

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASE NEXUS FOR SALES & USE TAX - WAYFAIR

South Dakota v. Wayfair, Inc. et. al. On May 1, 2016, South Dakota enacted economic nexus provisions for sales and use tax purposes.

The State looked to establish Nexus based on economic activity not just physical presence.

In South Dakota remote sellers are subject to the provisions if they meet one of two thresholds in either the current or previous calendar year:

• Sales threshold exceed $100,000 in South Dakota; or

• 200+ sales transactions delivered into South Dakota

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South Dakota v. Wayfair, Inc. et. al.U.S. Supreme Court Struck Down the Physical Presence Nexus Standard

On June 21, 2018, the U.S. Supreme Court struck down the physical presence nexus standard established in Quill Corp. v. North Dakota and Natl. Bellas Hess. v. Illinois Dept. of Rev. – a standard which had been in place for over 50 years

The majority opinion, written by Justice Kennedy in a 5 – 4 split, determined that the physical-presence rule of Quill was "unsound and incorrect" and overruled it. Other notable comments made by the majority:

• Quill is flawed on its own terms

• Quill is a judicially created tax shelter for businesses

• Interpretation of the Commerce Clause must conform to economic realties and dramatic technological and social changes

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SO WHAT DOES THIS MEAN?The keys to the U.S. Supreme Court upholding South Dakota’s economic nexus statute were the following:

• The new law now requires a remote seller to collect the tax only if the remote seller does a considerable amount of business in the State – that is, if the remote seller meets the economic thresholds that are being established on a state by state basis.

• The new law is not retroactive; however, note a remote seller could have historical nexus through one of the traditional methods (i.e., physical presence, agency, etc.).

• For those states which have yet to enact an economic threshold provision, the prior standard (i.e., physical presence, agency, etc.) is still the active standard!

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ECONOMIC THRESHOLD GENERALLYThe 100/200 Rule…

Since the Wayfair Decision was rendered, many states have been enacting legislation similar to the rule promulgated by South Dakota

• Gross sales in excess of $100,000 during the current or prior calendar year; or

• 200+ sales transactions delivered into the State during the current or prior calendar year

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SIGNIFICANT IMPACT

• States can assess tax on the seller, including a Not-For-Profit (“NFP”)• Noncompliance can cost the NFP significant tax, penalties and interest• The average sales tax rate is 8% and if not collected properly can turn a profitable gross

margin into a negative gross margin• Sales tax should be borne by the customer and not the seller• Tax burden to customers could adversely effect future sales• Administrative burden to NFP could adversely impact operations

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SALES BY NOT-FOR-PROFITS WHICH MAY BE SUBJECT TO SALES TAX

1. Tangible goods – i.e., clothing, tote bags, etc.2. Access to digital goods / libraries3. Content / information services4. Books / periodicals5. Subscriber / membership agreements

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STATE ENFORCEMENT DATESJuly 1, 2017 September 1, 2018 February 1, 2019Tennessee (Rule is stayed pending litigation) Mississippi Wyoming

October 1, 2017 October 1, 2018 April 1, 2019Massachusetts (Cookies) Alabama Minnesota California

Illinois NevadaAugust 17, 2017 Indiana North Dakota June 1, 2019Rhode Island* (Cookies, Election state) Kentucky Washington* Idaho

Maryland WisconsinJanuary 1, 2018 Michigan July 1, 2019Ohio (Cookies) Arkansas

November 1, 2018 New MexicoApril 1, 2018 New Jersey South Carolina VirginiaPennsylvania* (Election state) North Carolina South Dakota

June 21, 2018 December 1, 2018New York Colorado* Connecticut

July 1, 2018 January 1, 2019Hawaii Oklahoma (Election state) District of Columbia NebraskaMaine Vermont Georgia Utah

Iowa (Cookies) West VirginiaLouisiana

*Rule change after enforcement date took effect

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SIGNIFICANT ACTIONSWhat is Recommended to Address These Changes?

• Nexus Study

• Taxability Matrix (if applicable)

• Historical Quantification

• Voluntary Disclosures

• State Registrations

• Sales Tax Compliance

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASEEFFECTS ON FINANCIAL REPORTING

Internal Control Considerations

• Potential Modification of Systems Association Management Systems, Point-of-Sale systems, Third-Party Platforms Used General Ledger Systems and Chart of Accounts

• Potential Modification of Key Processes and Procedures Coordination with Fulfillment Houses Incorporation into monthly close procedures Modification of procedures for collection and remittance of tax Modification of reporting to include any tax liabilities Monitoring for compliance- update for operational and jurisdictional changes

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASEEFFECTS ON FINANCIAL REPORTING

Reporting and Disclosure Considerations• Potential loss contingency reporting (ASC Topic 450) Evaluate likelihood a loss has occurred and whether it’s estimable (taxes on past sales, penalties and interest) Evaluate whether material (consider direct & indirect effects) Determine whether to record and/or disclose

• Potential tax liabilities Evaluate various jurisdiction’s regulatory requirements and timing of tax collection and remission

• Rapidly changing environment –Stay current with multi-jurisdictional requirements Education, communication, and monitoring are essential

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ASSOCIATIONS, SALES TAX & THE WAYFAIR CASEQUESTIONS & ANSWERS

QUESTIONS AND ANSWERS

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For More Not-for-Profit insights, go to:https://www.cohnreznick.com/industries/public-sector/not-for-profit-and-education

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https://www.cohnreznick.com/industries/public-sector/not-for-profit-and-education

associations, sales tax, and the wayfair case...quill corp. v. north dakota and natl. bellashess. v....

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