The U.S. Supreme Court’s Wayfair Decision Was a Landmark Decision that Replaced the Physical Presence Test with An Economic Nexus Test Significantly Expanding the Tax Reach of Tax Jurisdictions
What Is Wayfield?
In our blog dated July 24, 2018, we predicted that the June 21, 2018 U.S. Supreme Court’s decision in S. Dakota v. Wayfair would likely have very significant tax consequences on both businesses and consumers. As of this date, business owners have definitely seen increased scrutiny and filing requirements by tax jurisdictions looking to expand their tax base, which in turn creates increased tax compliance costs. Consumers that previously may have avoided sales tax on out-of-state purchases are now finding sales tax as an additional cost of those purchases.
Where Is PA & Phila. Today?
In our blog dated December 19, 2018, we discussed NJ & PA’s reaction to the Wayfair decision. As is very common with many tax laws and their enforcement, they evolve. We want to share with you PA & Philadelphia’s current responses to the Wayfair decision.
Updated PA Response to Wayfair
Act 13 of 2019, enacted on June 28, 2019, codified the $100,000 sales threshold previously established in SUT Bulletin 2019-01, effective July 1, 2019. PA has eliminated the $10,000 sales threshold established under Act 43 of 2017 along with the previously required notice and reporting option for remote sellers and marketplace facilitators.
The updated PA law is that remote sellers and marketplace facilitators with more than $100,000 of gross PA sales in the previous 12 months will have to register for PA sales tax and collect and remit beginning July 1, 2019.
Updated Philadelphia Response to Wayfair
Philadelphia has two types of business taxes – the Net Profits Tax and the Business Income and Receipts Tax (BIRT).
The Net Profits Tax is imposed on the net profits from the operation of a trade, business, profession, enterprise or other activity by Philadelphia residents or non-residents who conduct business in Philadelphia. Sole proprietors are subject to this tax. Corporations are not.
In January of 2019, the Philadelphia Department of Revenue enacted an economic regulation for its BIRT. Effective January 1, 2019, a business with no physical presence in Philadelphia will have economic nexus in Philadelphia if it generates $100,000 in gross receipts during any 12-month period; AND has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.
Vendors of tangible personal property will still be protected from the net income tax if they otherwise meet the requirements of Public Law 86-272 (the standard before the enactment of Wayfair).
Tax Planning Tip #1:
Pre-Wayfair nexus rules were sometimes ignored by business owners who wishfully hoped that states would not find them operating in their states. These businesses hoped to avoid taxation and perhaps more importantly, the compliance filing and registration rules.
States continue to share information between them making it easier for states to identify non-filers. With states adopting dollar thresholds to determine economic nexus, it is now a math test to identify non-filers.
If returns and registration are not completed, the statute of limitations does not toll and the states looking for non-filers can assess a business at any time regarding prior years.
If your business meets the economic threshold in any state, consult with your tax professional about your filing requirements.
Tax Planning Tip #2:
Develop processes and systems to track your total sales on a revolving 12-month basis. Work with your tax professional to ensure that your systems are updated for dollar threshold changes as needed.
Tax Planning Tip #3:
Remember that states have different economic dollar thresholds. Some states may be as low as $10,000 total sales, others may be as high as $500,000.
Making matters more complicated, is that states have different effective dates and some have announced that their dollar thresholds will be changing on certain future dates.
Again, working with your tax professional is a must. You may also need information technology programing assistance.
Tax Planning Tip #4:
If you have economic substance, you MUST collect that state’s sales tax on your sales into that state and remit that tax to the appropriate state. Failure to do so means that your business is liable for the tax.
You will need to make a business decision if you wish to collect sales tax from dollar one. Why? What happens if you do not expect to surpass the $100,000 threshold a state may have enacted because your sales in previous years never exceeded $80,000 and that is where you are headed this year. Then significant sales of $30,000 are made which pushes you over the $100,000 threshold. It’s not just the $30,000 sales that are subject to the state’s sales tax, but the entire $110,000 sales made into that state.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.