In 2018, the U.S. Supreme Court ruled in favor of the states in South Dakota v. Wayfair, Inc., fundamentally changing the fabric of sales tax by allowing states to impose sales tax obligations on remote sellers doing business in their jurisdiction. The monumental decision sent immediate shockwaves to businesses of all sizes, but the real impact has continued to shape how companies are evolving their sales tax compliance strategies over the past few years.
Today, 45 states, parts of Alaska, and the District of Columbia have adopted Wayfair laws, known as economic nexus laws. However, with little guidance on uniformity, most states have taken their own approach to define the legislation.
As time has passed, the Wayfair umbrella has expanded and is actively creating more tax challenges for businesses as interpretations continue to change and expand. Here’s a few things CFOs need to know about the current tax landscape.
Remote sales tax rules at the local level
Once a remote seller establishes economic nexus with a state, it must register for sales tax and comply with all applicable sales tax requirements. But since economic nexus thresholds are different in every state, meeting these requirements and staying compliant becomes a challenge, especially for small and medium-sized businesses (SMBs). To make matters more complicated, many local governments are working to require economic nexus rules as local governments in home rule states have the power to levy and administer their own local sales tax.
The city of Chicago “received numerous inquiries on the topic of nexus” after Illinois adopted economic nexus in 2018. Since then, the city announced a safe harbor threshold of $100,000 in revenue from Chicago customers—meaning that businesses with no physical presence in Chicago are liable for certain city taxes if they meet or exceed that threshold.
This year, we could see localities in states like Alabama, Alaska, Arizona, Colorado and Louisiana follow Chicago’s lead and impose more remote sales tax rules at the local level. It’s critical to remain up-to-date on these changing regulations so businesses aren’t penalized by local tax authorities.
Income tax requirements for remote sellers
California recently introduced a retroactive income tax based on the Wayfair ruling that creates income tax obligations for online sellers in the state for the first time. California’s recent decision to retroactively apply corporate income tax obligations to out-of-state ecommerce sellers launches an unexpected tax compliance burden already imposed on businesses—especially small businesses. Because California is the first state to take this step, it’s probable that other states will feel empowered to follow a similar path.
Sales tax in the metaverse
While the metaverse may still be in its infancy, many companies are starting to embrace the new digital world and as a result, conduct commerce within it. In the last year alone, real estate sales in the metaverse topped $500 million, a number which is expected to double over the next few months. While many states currently don’t tax transactions occurring in virtual worlds, some are beginning to explore moves like imposing state and local sales tax charges.
But currently, one of the biggest hurdles to taxing transactions in the metaverse is that the metaverse is still a new concept to many tax authorities, making it unclear what transactions fall under current sales tax obligations. Although all sales transactions are presumed taxable in states with a sales tax (unless there’s a specific exemption or exclusion), most states haven’t yet clarified which sales tax laws apply to sales made in the metaverse.
While this situation is likely to play out over the next few years with the expansion of the metaverse, the CPA firm Prager Metis recently announced the creation of a metaverse headquarters to help businesses navigate the complex tax implications of operating in the metaverse. Taxing transactions in the metaverse will likely prove to be as vast and complex as the metaverse itself, so CFOs should remain vigilant about how governments are approaching the issue, as sooner or later there will be taxes.
In the wake of the Wayfair decision, businesses and governments alike had to immediately evolve almost overnight to respond to the new rule. As the past few years have shown us, the tax landscape continues to be dynamic and unpredictable for businesses. We can expect these evolving tax regulations to continue as more jurisdictions respond to the 2018 decision. It’s critical for CFOs to stay on top of these changes and how they could impact their businesses.