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COVID-19 and the Wayfair impact on CPA advisory

Will Hill, MBA  Product Manager — Tax Professionals Advisory, Thomson Reuters

Will Hill, MBA  Product Manager — Tax Professionals Advisory, Thomson Reuters

It has been two years since the Wayfair case passed through the Supreme Court, so why are people discussing the Wayfair impact on CPA advisory now?

In this episode of Pulse of Practice “Second wave of Wayfair”, Paul Miller, CPA from Business by Design, and I are joined by Shaun Hunley, Executive Editor at Thomson Reuters. We discuss the importance of this next wave of the Wayfair decision, and why sales tax revenue should be added to your advisory discussions with clients.

Why are people talking about Wayfair again?

While it has been two years since the case, the Wayfair decision is coming to light again because of COVID-19. COVID-19 has greatly affected sales tax revenue with the states, because many brick and mortar retailers have been forced to close their locations, either temporarily or permanently, based on the economic effects of the virus.

“What I am predicting in the next six months or so, states are going to become more aggressive in auditing remote sellers,” noted Shaun. “They’re going to do so under these economic nexus laws, which was what we were seeing with the Wayfair case with South Dakota’s economic nexus law. This is why we’re talking about Wayfair again.”

Nexus is a concept that came from the US Constitution, which basically says for a state to tax you, or to have a reporting obligation in that state, you must have a minimum contact with that state. In the sales tax area, for a very long time, they required a physical presence in the state in order to have nexus (employees in that state, property in that state, etc.). Wayfair changed that dramatically, as we’re seeing now.

“A company like Wayfair, obviously with internet sales, had no physical presence whatsoever in the state of South Dakota,” added Shaun. “They did not collect sales tax. But that is not the case anymore. Physical presence is not the relevant standard anymore for nexus.”

How does Wayfair impact CPA advisory?

There can tend to be some mystery with clients around interstate commerce and the sales tax arena. Why should CPA firms care about this and what impact does it have on their clients?

“I always tell practitioners, you’ve got to know your clients,” said Shaun. “Obviously for many reasons, but many firms do not think about the sales tax arena. They’re rather focused on the income tax arena, but the sales tax arena is much more important now under Wayfair. And if you do not file those sales tax reports in those states, the statue of limitations, the amount of time the state has for enforcing those laws, is open indefinitely.”

Clients, and thus their advisors, need to care, because the state could possibly come after you and go back as far as they want if you have never filed. In addition to this, if there was a rebate or something for sales tax to collect, if you were going to collect from a certain state and get a refund, there is a limitation to that. There is a need for a discussion on the Wayfair impact in your CPA advisory practice.

“That goes with income tax or anything,” added Paul. “There’s kind of this double whammy. Someone could be liable for multi-years in a state. You have to know your client, and I think asking a few more questions would be a good start.”

The COVID-19 impact on the Wayfair decision and advisory

So, you have a client and COVID-19 hits. They are forced to shut their doors, while to sustain their own livelihoods they’ve shifted online and started to sell goods and services wherever they could. How do you initiate that conversation from the relationship perspective?

Start by asking the question, ‘Are you operating in other states?’ If yes, then suggest that they get to know those states. What is that state’s de minimus threshold, before you reach the activity of having to collect?

It is a huge administrative burden on these clients, especially small businesses. The majority realize that Wayfair has affected their business, but very few have implemented all the changes necessary to comply.

“Clients may need your help in understanding,” said Shaun. “I would say most of our small businesses are handling sales tax compliance manually, and this is where they really need the practitioners to step in and help. Even if you don’t do sales tax on a regular basis, they may come to you for this. They may blame you for not proactively mentioning it to them.”

With all the resources needed, how does an accountant cover themselves for compliance?

If you had all the resources in the world, you would do a nexus study for your clients. You would look at every single state’s law and tell them where they need to file. However, while that is a great option for a big firm, if you’re a small firm this is probably not going to happen. Your clients may not want to pay for it because they either do not find it valuable, or they’re willing to take the audit risk.

“What I tell CPAs, tax practitioners, when you’re going into this area, at a minimum you need to proactively reach out to them and let them know about Wayfair,” said Shaun. “Let them know it is affecting their business and make some recommendations on where to file. Proactively reach out. Educate.”

Shaun also recommends specific language in your engagement letters, calling out what you do not do when it comes to general consulting. And if you are really lost as a firm and advisor, go on Checkpoint.

“How do you keep up with all of this? Checkpoint,” noted Shaun. “There is a fantastic tool that I use every day. It is the State and Local Create-a-Chart. It’s organized by tax type, if you want to look at sales tax, and there are several charts on nexus.”

Wayfair is not only affecting sales tax. It is now affecting income tax nexus as well, and with the coronavirus, a spotlight will be shining on auditing the remote aspect of your clients’ businesses. Be prepared as an advisor, go forward and help your clients and they step into the future of tax.

Listen to the “Second wave of Wayfair” episode of the Pulse of the Practice podcast on your preferred platform (Apple, Spotify, Stitcher) or here.

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