State of Wayfair: Going Beyond Sales Tax in Pennsylvania

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

Wayfair’s effect is reaching beyond sales tax.

As if the new burden of remitting sales taxes to several thousand taxing jurisdictions wasn’t daunting enough, accountants are now warning businesses that the U.S. Supreme Court’s Wayfair decision creates compliance issues beyond state and local sales taxes.

Members of the Pennsylvania Institute of Certified Public Accountants (PICPA) are advising clients to be on the lookout for new obligations in income taxes and financial reporting for businesses that follow generally accepted accounting principles.

Nearly 11,000 separate taxing jurisdictions in the U.S. currently impose some sort of sales tax, Matthew D. Melinson, a CPA and partner in Grant Thornton’s Philadelphia office and leader of the Atlantic Coast region state and local tax practice, co-wrote in an article on PICPA’s website.

States are likely looking for ways to leverage the ruling to expand revenue collection, not only with sales taxes but also for income and franchise taxes, Melinson told Bloomberg Tax Sept. 6.

The June 21 Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—has many states looking to expand their authority over online sales taxation. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster.

The court didn’t rule on the validity of South Dakota’s law in the absence of Quill, and one of three things could happen soon to allow the South Dakota law to go into effect: (1) a circuit court could lift an injunction pinning down the law, (2) the legislature could approve a bill during a planned Sept. 12 special session that would clear the injunction, or (3) the state and the companies in the case could settle.

Meanwhile, dozens of states are passing versions of South Dakota’s law or enforcing existing nexus laws and rules they already have on the books.

Retroactive Income Tax?

While it appears increasingly unlikely that states will use the Wayfair decision to impose sales and use taxes retroactively, states with economic nexus laws are likely to proceed retroactively with income taxes, Melinson said. Given past court cases, “states have long felt empowered to impose income taxes based upon economic presence, and the Wayfair decision seems to solidify that premise,” Melinson told Bloomberg Tax in an email.

Although the Supreme Court didn’t explicitly say in Wayfair that substantial economic presence creates nexus beyond sales and use taxes, some states could enact laws to apply economic nexus to income taxes, Melinson and his colleagues wrote. “Businesses would be wise to analyze their sales tax and income tax nexus footprints together,” the article said.

Income taxes weren’t directly addressed in the case, “but it seems implicit” in the decision, Melinson told Bloomberg Tax Sept. 6.

Some companies are already planning for the possibility of more income taxes. In its second quarter earnings, Wells Fargo included a net discrete income tax expense of $481 million, which it attributed mostly to state income taxes driven by Wayfair.

Alabama’s Book Battle

Both sides in a years-long Alabama sales tax dispute argued the Wayfair decision helped their case, although the state court ultimately decided the matter without factoring in the ruling.

The state’s civil appeals court, which is one step down from the Alabama Supreme Court, found in favor of Scholastic Book Clubs as the company fights a sales tax assessment for the years 2007-13. The state’s revenue department has argued Scholastic essentially uses schoolteachers as sales agents or representatives, but Scholastic and the appeals court disagree. Scholastic is based in Missouri and sells books through catalogs distributed to schoolteachers and a website.

The revenue department argued in a July letter brief—requested by the state court in response to Wayfair—that Wayfair helped its case by eliminating the physical presence standard and setting up a substantial nexus test instead. Scholastic, on the other hand, argued Wayfair requires that states simplify their tax systems such as by joining the Streamlined Sales and Use Tax Agreement, which Alabama hasn’t done, or else risk imposing undue burdens on interstate commerce.

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