The Wayfair Sales Tax Decision (Nightmare) and How It Affects the Printing Industry
Warning!! Your sales tax compliance exposure has EXPLODED!!
The Wayfair Decision (Nightmare) ...
Ordering home goods from Wayfair is so much fun. If you need door hooks, kitchen tongs, furniture, or just about anything for your home, all you have to do is go online, click around, then in a day or two a package arrives on your doorstep. We all do it. We all love it. Besides the convenience, another not-so-hidden benefit was that no sales tax was applied to your invoice. This was allowed because Wayfair did not have a "physical presence" in your state (unless you live in Massachusetts, where Wayfair is located).
This sales tax exemption based solely on the nexus rules of "physical presence" ended in June 2018 in accordance with a Supreme Court decision. The new nexus rule of "economic presence" along with "physical presence" is now the law of the land.
South Dakota v. Wayfair were the parties to this Supreme Court case that is changing the entire sales tax landscape in the U.S. This landmark decision also affected Amazon, Dell, and all online retailers.
So, how does this case affect your printing company?
By collateral damage, ANY company that sells and delivers tangible products (i.e. printed materials), either physically or electronically, into a state is now subject to these new rules. Services are also subject to these new rules in some states. The proponents of the new rules cite the uneven playing field that existed where the onus was on the buyer to voluntarily report and pay USE taxes (the sales tax equivalent), and that home state sellers were therefore competitively disadvantaged by the out-of-state sellers who were not required to charge sales tax.
- Physical presence (nexus) of the seller in a particular state (offices, warehouses, employees, property) is no longer the sole criteria for registering to do business in a state in which goods are delivered, which, therefore, triggers the requirement for the seller to collect and report sales tax in that state.
- Economic presence (nexus) is defined as any connection to a state, such as by company trucks entering a state, advertising in a state, employees active in a state, and/or by delivering tangible products into a state by any means including USPS and common carrier (UPS, FedEx, etc.).
In order to spare small businesses from this administrative nightmare, the Supreme Court case applied a minimum annual threshold of 200 transactions or $100,000. This means that once the number of transactions or dollar value of the seller's shipments exceed this threshold in a given year, the seller must then register to do business in that state (starting in the next year) and therefore begin collecting and reporting sales tax. This ruling technically only pertains to South Dakota, though many, but not all, states have adopted the same or similar standard.
Sales Tax Effect on Mailing Operations
In addition to commercial printers' newfound exposure when distributing printed material to an out of state customer location, further collateral damage is inflicted on printing companies that distribute printed materials using mailing lists or that contract with a mail house. For example, in 2019, for a direct mail project where printed material is distributed into multiple states, the number of pieces ending up in each state must be cumulatively maintained until 200 is reached. At the same time the cumulative pro rata dollar value of those individual pieces must be maintained, by state, until the $100,000 threshold is met. If either of these thresholds are exceeded, then the seller must register in that state effective Jan. 1, 2020.
The only good news is that some states have sales tax exemptions for promotional materials or direct mail advertising. The bad news is that sellers must still register to do business and report their exempt sales, even if tax exemptions exist in that state. Also frustrating and complex are each state's sales tax exemption rules and definitions of exempt printed materials. These rules are still evolving and vary from state to state, and many states have multiple tax rates by municipality, borough, county, or parish.
Outside Compliance Help
As you can imagine, when there is a need, there is a way.
The large company sales tax compliance firms, such as Avalara, Vertex, and Thomson Reuters, are now offering their products and services to small and mid-market companies. EFI, for example, has teamed up with Thomson Reuters for its One Source product that applies the appropriate state sales tax to invoices from customer data files or from a mailing list. It will also supply you with the required state sales tax reports from your transaction data. Avalara and Vertex will integrate software with your accounting system and provide the multiple state tax info for invoicing, file your sales tax forms and pay the tax as well. Other tax compliance companies will provide standalone services or add sales tax modules to operate seamlessly with your accounting system.
We recommend that a study be conducted to determine your exposure. A useful preliminary tool used by the states is a nexus questionnaire that addresses common criteria for identifying physical and economic presence. The questionnaire starts with sales by state. Once exposure is identified by state, a more detailed analysis can be conducted to determine the dollar amount at risk, available exemptions, and timing of registration. Registration forms can then be completed, including Voluntary Disclosure Applications. By voluntarily registering, states may limit retroactive assessments.
State Tax Departments have been waiting for this Supreme Court outcome for more than 25 years and are geared up to enforce the new expanded rules. There are more revenue agents being hired for sales tax compliance than for any other type of tax collection. The states see this as tax collection heaven and are poised to enforce it on companies unaware of their newfound responsibilities to register and collect their state's sales taxes.
About the Author
Bart Krupnick, CPA, CVA, is a principal of The Becker Group, a division of TMDL CPA's and Management Advisors, and author of Sales and Use Tax Guides for Printing Companies. Becker/TMDL specializes in providing tax, audit, accounting, management advisory, valuation, and merger/acquisition advisory services specifically to the printing and packaging industry. Contributor: Mathew Broyles, CPA mbroyles@TMDLcpa.com
Bart Krupnick is a principal of “The Becker Group”, a division of Toal Murray Day and Lalor (TMDL) CPA’s and Management Advisors in Annapolis Maryland. The Becker Group specializes in providing advisory services specific to the Printing and Packaging Industry, as well as the traditional CPA services of accounting, audit and tax, nationwide.
Bart focuses on assisting businesses make the transition from entrepreneurial firms to professionally managed organizations. This includes counseling business owners on management continuity and succession planning, personal financial, retirement and estate planning, and buy/sell/merge opportunities. His easy-going style emphasizes a “holistic” approach to management that aligns business objectives with the owner’s personal goals. This customized service provides a clear framework for the management team to achieve success. Other specialized services include value-added strategies, mergers and acquisitions, cost accounting and hourly cost rates, compensation and incentive plans, management reporting, research and development (R&D) tax credit, IC Discs and other tax minimization strategies for manufacturing entities.
Bart provides these services from a solid background as a practicing CPA (Certified Public Accountant) and CVA (Certified Business Valuation Analyst).
Bart’s notable accomplishments include authoring numerous business management articles, including publications on sales taxation for the printing industry. Bart also speaks at printing industry events and provides counsel to national and regional printing associations on tax legislation affecting the industry. He has also been an expert witness regarding financial matters affecting companies within the printing industry.