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Impact of Wayfair Case on e-Commerce Companies

Founded in Tech Episode 3

In this special episode of Founded in Tech’s Tech Tips series, guest speakers Zsia Rosmarin and Lejdi McNair from Withum’s National Tax Services Team discuss the impact of the Wayfair case and what companies – especially e-Commerce companies – need to be aware of in the wake of it, how marketplace facilitators play a role in sales tax, and what to do to become compliant.

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Mark Eckerle:
Welcome to this episode of founded in tech. I am your host, Mark Eckerle and today’s show is part of our tech tips series, where we have special guest host Zsia Rosmarin who’s a tax partner here at Withum. She sat down with Lejdi McNair, who is a leader in our state and local tax department to discuss sales tax. On today’s episode, they discuss what factors trigger physical or economic nexus, the ramifications of transitioning to a remote work environment, and much more. This episode had a bunch of great insights from Lejdi and Zsia. And I hope you enjoy the conversation.

Zsia Rosmarin:
Hi everyone. We’re here to talk about sales tax and what we’re seeing in the market. I’m Zsia Rosmarin very excited to be here today with my colleague Lejdi McNair, who leads our sales tax practice. Um, gosh Lejdi, what a year 2020 has been between COVID and then you throw on top of that, you know, sales tax and all the new rules, you know, Wayfair came out about, I don’t know, even two and a half years at this point, but, um, we’ve certainly seen a lot of attention on sales tax. So what are you seeing? What are we seeing from our clients and what’s going on in the marketplace?

Lejdi McNair:
Yeah, thanks Zsia. Hi, everyone. Happy to be here. It’s definitely been very interesting. Last couple of years. Um, one Wayfair case passed in June of 2018. I was on maternity leave. Um, came back just because of it and, um, showing up it’s been probably our busiest last two years.

Lejdi McNair:
I really didn’t expect initially to see so much turn around and compliant, uh, compliant on the compliance side for my clients, but it’s definitely been interesting. Um, I would say most of our clients totally embraced the Wayfair case and, um, and you know, the obligations that came with it. Um, so you know, what we have seen on our end is a lot of, um, um, economic nexus studies, taxability research we’ve seen most recently due to COVID the last six, seven months, a lot of mergers and acquisitions activity. Um, so, you know, sales tax has definitely been no longer the stepchild of all taxes. So, um, and priority-wise, um, we’ve definitely climbed up. Every time Zsia and I get on our due diligence calls, you know, um, there are 20 other people on the other side, just talking about sales tax. So, you know, super, super, um, exciting time, not so much for a lot of our clients because obviously the whole imposition of economic nexus, it’s created a lot of headaches for our clients, right? Because it’s not just, um, nexus requirements. There’s a lot of things that come with that, which is, you know, registrations, um, doing taxability research for the product and obviously compliance, which compliance can be pretty burdensome for our smaller clients.

Zsia Rosmarin:
Yeah. So, so you kind of throw around some terms that maybe some of our listeners familiar with

Zsia Rosmarin:
This, this concept of nexus economic nexus, physical nexus. Can you just explain to us what, what does that mean?

Lejdi McNair:
Yeah, no, I mean, these are all super important terms for sales tax. Um, I love when I get on a call with a couple of my clients or prospects, they know exactly what nexus is, but if you don’t know nexus is actually a connection that a company has with a particular state. And depending on the state and depending on the rules and requirements, that connection is established by having payroll in the state, by having an actual office, um, employees 1099ers. Um, also due to Wayfair case next is established by having just near sales into that jurisdiction. So if you’re a company that has a hundred thousand dollars of revenue or a couple of hundred of transaction in a particular state, now you have nexus.

Zsia Rosmarin:
And when you talk about revenue in the state, are you talking about, you know, if I ship a good into the state, for example, we have a lot of e-com customers, and I know it’s based on, you know, where, where it shipped to, that’s pretty easy, what SaaS company or tech company and everything’s in the cloud. And where is it? How do you know where the sale is?

Lejdi McNair:
That is one of the hardest things for our, um, clients that aren’t in the SaaS world or digital goods. You know, a lot of our clients sell software subscription to the company that have used this all over the US, right? So sourcing the sales is probably one of the hardest part for some of our clients and trying to figure out what portion of the sale goes into a particular jurisdiction and how to quantify it. Right. So we generally tell them to use a billing address, um, just for the easier to, you know, have a convenience, uh, unless you have really to understanding where all the users are sitting. And generally I would say most of our clients don’t really know where the users are sitting. So therefore they can’t really capture that information. So we’ll default back to wherever the, um, their customers, the billing address and the invoice address is based out of,

Zsia Rosmarin:
Yeah, some of these rules came into effect without really thinking about, you know, tech companies and, and, and how you actually find that. So I’m sure this has added a lot of complexity with this, with this new economic nexus concept. Um, one of the other things we’re seeing, and we get this question a lot lately is as a result of COVID, um, companies now have employees, or, or as you call them 1099ers or as I refer to them as independent contractors, um, you know, they’re, they’re all over the country, right? We’re getting examples every day. I had somebody I’m just going to use an example. I had an employee that was, you know, in New York and now they’re in Florida. What does that mean for nexus? We’re not even gonna get into payroll cause here today, just focusing on, on sales tax nexus. Um, and we’re seeing this and we’re seeing, you know, I’m there permanently, I’m there temporarily. Um, but what does that mean for the sales tax world when we’ve got employees now all over the country?

Lejdi McNair:
Yeah. I mean, Florida is a great example. Zsia. I have to say a lot of our clients kind of moved to Florida temporarily or permanently. Um, it seems like Florida would be the best state to move to under COVID. I actually debated myself going there. Um, but Florida is a great example because Florida is not a state that has passed economic nexus. So super important for our clients that have already established nexus in every state. And now you have a payroll or a 1099er going into Florida. So that changes the whole dynamic because despite the economic nexus rules, now you have physical nexus. So you’re going to have to start collecting sales tax in the state should what you’re selling in the state is subject to sales tax or not. So Florida is definitely a good example, but really, you know, what that means is if you do have even, um, a employee that usually, you know, or not usually, but what live in New York or living in New Jersey and moved to Florida, that means that physical nexus was created. Right. And I have to say on my e-commerce client side, Florida is one of those States in Missouri that they’re not registered in because it both States don’t have economic nexus requirements. So super important to focus if you have employees or, or contractors, or 1099ers moving into Florida due to COVID because it will definitely change our requirements there.

Zsia Rosmarin:
Wow, so we really need to think about employees that may want to stay, or they may want to come back something that maybe companies should look at their HR policies. Cause like you just said, and just for clarity, you can have either physical nexus or economic nexus either one of those creates nexus. You certainly don’t have to have both. So you may have not, you know, had economic nexus and in Florida, for example, because they just don’t have that concept. But now you have physical nexus there. So certainly certainly lots to consider there as, as a result of COVID. Um, so if I’m listening to this today, you know, gosh, you know, you said this kind of came into effect two years ago. Here we are. It’s 2021. I’m a little bit nervous. Um, I have some revenue I haven’t been compliant. Maybe I’ve been, or I’ve been trying to, maybe I’ve only been, you know, paying tax. And again, I’m gonna use New York as an example. I’ve only been paying sales tax. Is it too late for me? Do I need to go back? Um, and, and you know, am I going to be out of pocket from 2019 2020? What, what kind of ideas do you have around getting me compliant, going forward, looking back. Um, can you talk a little bit about that?

Lejdi McNair:
Yeah, of course

Lejdi McNair:
It’s never too late. It’s never too late to do the right thing. Right? So initially one, the Wayfair CA case passed, uh, some of our clients and just companies in general thought it would go away and it would be appealed and go away. So they were hesitant at the beginning to become compliant, but obviously it’s here to stay, economic nexus will not go away. Most likely the States like Florida, Missouri will pass economic nexus law requirements sometimes. in the near future. So it’s never too late to do the right thing. Um, our approach that we take here in Withum is we, we start with doing an actual nexus study, right, to determine where the company has nexus requirements. And then we look to the next steps, which is depending on what type of products or revenue things the client has, we look into the taxability of the product.

Lejdi McNair:
And we also look at the potential exposure once we have a good, clear picture of what the potential exposure is. We look into different ways to mitigate that exposure, right? So if, for example, Massachusetts or Washington, or a few of the States that we’ve identified that the company has nexus in potential exposure, we probably will recommend doing a voluntary disclosure agreement to help with the abatement of penalties and some interest if, um, our client of a prospect potentially has nexus, but doesn’t have taxable sales. That’s a different approach that we take, right? Because there’s, there is no exposure per se, but maybe there is a filing requirement to report gross sales. Um, if a company has nexus and the potential exposure is pretty significant and pretty small, then we discuss with our client an approach of potentially registering in that state going forward. Right. Um, so there are a lot of different ways that we can approach and provide solutions for our clients.

Lejdi McNair:
But what we have noticed is, especially because of COVID and a lot of the due diligence that mergers and acquisitions that are going on right now, a lot of the work that we did with our clients a couple of years ago, right. It’s definitely still helpful with our current clients if they go through a due diligence process. So super important to at least start thinking if you haven’t yet about the nexus requirements, even if you started with the nexus study, to give you a clear understanding where you stand in potential exposure, right. And what that number potentially is. So you can play it internally in regards to the next steps. Um, you know, another big part of this exercise is looking at not only the products, but identifying your customers and knowing who your customers are in a sense, do you fail to accept customers and perhaps the solution is to require exemption certificate or to have a exemption certificate process in place.

Lejdi McNair:
Right? Another part of this exercise also is that we need to consider, have there been any changes of law in regards to taxability? Um, that’s also a big part of, uh, of the exercise. We have a handful of clients that they’ll sell food items, the products online, and the taxability of those products changes variably in this state. So, um, super important to kind of look through all in this little details that doesn’t really mean much if you’re not in the sales tax world, but it definitely it’s important, um, to identify exposure of potential sales tax exposure.

Zsia Rosmarin:
Yeah. And you brought up things like, it would seem to me that first, first things, first we identify if the company has nexus step two, if the company has nexus, what were the sales and into the state step three, were those sales taxable. And like you said, you know, some of our clients are DTC direct to consumer. Some of our clients are B2B, so they may not have to, like you just said, so it may not. So the picture gets deeper, we dig deeper and deeper and unpeel each of those layers to really determine taxability that, which is great. Um, one of the questions we do get a lot is, Oh, you know, I’m an e-comm company. I sell my product on Amazon. Is Amazon taking care of the sales taxes for me. So I’m good. Um, I’m okay. Right. What are you seeing in that regard? Yeah,

Lejdi McNair:
So, um, that’s a great question. Um, so we do, when we do the nexus study, part of our review also is identifying the different types of channels right. Of how sales are made. So if a client or a prospect sells through Amazon, and we have a lot of our clients in the e-commerce space where they do sell through their online platform, but also they sell through eBay or Amazon. And, um, the, the question is, what do I do with the sales? Are these sales taxable to me? And, you know, the answer is most likely not, but why, because Amazon and eBay’s and the marketplace facilitators are required in most jurisdictions to collect the sales tax and remit it on your behalf. So what I tell my clients is, you know, to be for that that’s happening, make sure that you get a report from Amazon and eBay.

Lejdi McNair:
They’re supposed to give, um, their, their, uh, companies a report every month to show the sales tax that was collected and where it was collected. So, you know, that’s a way to know for sure. And obviously Amazon has a full, dedicated sale tax team. So you sort of want to hope they’re doing things correctly, but just to give our clients a sense of ease, they should get this report from their marketplace facilitators. Um, however, and, and, you know, marketplace facilitators really was put in place by for the reason of companies like eBay and Amazon, because the States wanting to make sure that sales tax was being collected on these sales that were flowing through the platform. Right. Um, however, marketplace facilitator rules is creating a lot of headaches for the small companies that are providing this service because not only they have to be compliant on their sales, but also now they have to start collecting sales tax and remit on the marketplace, facilitator sales.

Lejdi McNair:
So, um, and the way that it works system wise, they have to be captured separately, independently in the sales tax software. So it’s definitely created a lot of headaches for our smaller client non-Amazon, not eBay clients to be compliant.

Zsia Rosmarin:
Yeah. So this has been super helpful. I know we’ve only actually even just touched on the surface, but you know, if somebody wants to reach out, they can certainly go to Withum.com For more information. Um, Lejdi, just high level, what services, what, what specifically can we do to help? Can we help with registrations? Do we do sales tax compliance so forth, give us a high level overview of what your team actually does. Yeah. We’ve been doing everything when it comes to sales tax. So, um, what I like to, or what I pride myself or my team to do is we take the process from the beginning to the end.

Lejdi McNair:
And what I mean by that is we start with the nexus study, with the taxability review with a potential exposure analysis, BDAs, registrations. And we also help with implementing software tools to capture the taxability like Avalara tax jar, and to make sure that companies are compliant and they start, you know, function on their own. We go from talking to our clients every day and then once we get them set up and completely fully closed the cycle, they do pretty well managing and retaining sales tax after that.

Zsia Rosmarin:
Wow, fantastic. It’s certainly been great catching up today. Looking forward to more, to come on the sales tax horizon. If anyone has any questions again, I’m Zsia Rosmarin, that was Lejdi McNair, and you can visit us on wisdom.com and we have a salt which has state and local tax landing page. Wonderful speaking to everyone.

Mark Eckerle:
Thank you for tuning in. If you liked it wanted to hear more

Lejdi McNair:
And subscribe and we’ll see you next time on founded in tech.

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