The Wayfair Case’s Impact on State Income Tax
“Wayfair” is the new buzzword in sales tax reporting, and for good reason. You have likely heard that the Supreme Court’s decision in South Dakota v. Wayfair, Inc. has resulted in businesses being required to collect and remit sales tax to certain states in which they have no physical presence. Have you wondered how this change affects your requirements for income tax filing?
Does This Change Income Tax Nexus?
While the Wayfair decision did not directly impact income tax nexus, the removal of a physical presence requirement for sales tax nexus may encourage more states to enact a sales factor indicator for income tax nexus. In fact, states such as Alabama, California, Colorado, Connecticut, Michigan, New York, and Tennessee already have bright-line tests in place, which consider a business with certain levels of property, payroll or sales in the state to have income tax nexus. Other states, such as Ohio and Washington have enacted gross receipts taxes, which come into play once a business reaches a certain level of activity in the state.
It’s important to note that the Wayfair decision does not overrule P.L. 86-272, which allows businesses to send representatives into a state to solicit orders for personal property without being subject to a tax based on net income. However, a state may still impose a tax not based upon income, such as a minimum tax or a net worth tax.
What Does This Mean for My Business?
States are continually enacting changes related to nexus and various types of taxes. As your business becomes active in other states, it’s more important than ever to discuss potential income tax exposure with your CPA. Here are some steps you can take to protect your business:
- Regularly watch your sales levels in all states – both dollar amount and number of transactions.
- If your business employs workers in other states, even if just for solicitation of sales, be aware of the level of payroll in each state.
- Be aware of each state’s requirements. The landscape of nexus is constantly changing as more and more states enact legislation.
- Inform your CPA immediately when you notice changes in your level of business in other states.
RBI member Cray Kaiser Ltd. is available to help you navigate through these ever-changing requirements, and to consider potential exposure to income tax reporting as a result. If you are unsure of the requirements of states you sell into, please contact us to discuss.