Three years after Wayfair: Future impact and lingering issues

By Jeff Dorris, CPA, and Lee Fritts, CPA

Editor: Bridget McCann, CPA

The Supreme Court's decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), on June 21, 2018, was a groundbreaking state and local tax development. Three years after the decision, concerns about the impact of the decision and the added cost and compliance burden for taxpayers remain. Legislators are looking outward to apply Wayfair principles beyond sales tax, while state administrators have yet to streamline processes that could ensure higher sales tax compliance rates. This column examines how businesses must adapt to new tax burdens resulting from Wayfair while still grappling with the nuances of lingering sales tax issues.

Future impact
Income tax

Before Wayfair, many states enacted economic nexus rules to determine if an out-of-state business created nexus. Since Wayfair, only four states (Hawaii, Massachusetts, Pennsylvania, and Texas1) have established a bright-line sales amount for determining economic nexus for income or franchise tax purposes. Given state budget constraints during the COVID-19 pandemic, it is somewhat surprising that state legislators have not chosen to enact laws that piggyback on the sales or transaction thresholds permitted in Wayfair. It is possible that states are concentrating their efforts toward creating new taxes or enforcing existing ones, due to several factors that effectively reduce the amount of revenue that can be obtained. Such factors may include additional limitations on a state's ability to subject income to tax where taxpayers are protected by P.L. 86-272, the Interstate Income Act of 1959; a smaller tax base after deductions and apportionment; and lack of officer responsibility for non-trust fund taxes.

Digital taxes

The surprising lack of impact on income taxes, however, does not mean state legislators do not feel emboldened by Wayfair. A new gross receipts tax on digital advertising passed in Maryland in February, overriding Gov. Larry Hogan's veto. This tax applies to businesses with a minimum amount of digital advertising "in the state," regardless of whether a business has a physical presence in Maryland. A business must have global annual gross revenues exceeding $100 million to be subject to the tax. However, any business with more than $1 million of Maryland-source digital advertising revenue is required to file the return (although no tax would be due if global revenue did not exceed $100 million).2 While no additional bills are likely to pass until litigation in Maryland is resolved, at least eight other jurisdictions (Connecticut, the District of Columbia, Indiana, Kansas, Nebraska, New York, Oregon, and Washington state) have considered digital advertising bill proposals similar to Maryland's.3 Considering that Maryland's new law was enacted jointly with one applying sales tax to digital products, lawmakers were undoubtedly comfortable with their authority to apply the new tax to out-of-state businesses afterWayfair.

New local taxes

States are not the only jurisdictions relying on economic nexus provisions for new sources of funds. Chicago's controversial personal property lease tax, which can apply to downloaded and cloud-accessed software, has a new $100,000 sales threshold for determining economic nexus, effective July 1, 2021. Other new taxes or economic nexus provisions have been enacted in Philadelphia, San Francisco, and Portland, Ore.4

Persistent Wayfair issues

Most businesses with customers in multiple states have at least confronted the new reality of Wayfair. Many state administrators, however, have not advanced their processes or systems to make registering for and filing sales tax returns any easier. For businesses, the cost of compliance can be far more burdensome than they imagine when first confronting their new tax obligations.

Registration issues

Before a business can collect sales tax from its customers, states require the business to be registered for sales tax with the taxing authority. All states have an online system for registering and for filing sales and use tax returns. However, not all states have made significant updates to their online system to keep up with the influx of business registrations and tax return filings resulting fromWayfair.

States are more commonly requesting taxpayers to have first been issued a secretary of state registration number to complete their sales tax registration. In the authors' experience, the District of Columbia and Kentucky are two such examples. A remote business selling into a state with no presence in the state generally would not be required under business registration laws to register with a secretary of state's office. However, many state tax authorities have not trained their personnel or updated their online systems to reflect the reality that such businesses now may need to register for sales tax. Taxpayers calling state authorities for assistance are often told they cannot register for sales tax without first registering with the secretary of state. In these instances, many taxpayers will just register with the secretary of state to avoid the hassle of trying to find a workaround. Persistent calls to state authorities in an effort to find the person who can register a business without a secretary of state registration can be time-consuming and frustrating, yet agreeing to annual filings with the secretary of state without further analysis can also increase the cost of compliance for businesses. Whether to register with a secretary of state to do business in the state is not always clear. Sometimes, a business registration can require filing other tax returns for which a taxpayer may not otherwise be subject.

Even if a state recognizes that remote sellers are not necessarily required to register with a secretary of state, many states have not yet adapted their systems to accept non-U.S. tax filers. Neither the provisions under the South Dakota law upheld in Wayfair nor similar laws in each state limit a state's ability to require sales tax collection solely to U.S. businesses. Foreign businesses are also required to collect and remit sales tax under these laws; yet for many reasons, the same businesses are not required to file or report any tax information at the federal level. Without a federal identification number for the business, or at least a U.S. Social Security number for an officer, many states' systems cannot even process a registration. It has been the authors' experience that some states' online systems will not even accept an address or telephone number that is not in a U.S. format.

Similarly, with secretary of state registrations, calls for assistance are at the mercy of the "customer service lottery," with multiple calls being required to find someone who can assist with a non-U.S. registration. One of the authors recently was told Maryland would not process a non-U.S. business registration until the foreign CFO obtained an apostille on a tax residency certificate to prove he was not a U.S. person. Maryland would not register the business for sales tax before this action was undertaken. If states are requiring non-U.S. businesses to collect and remit sales tax, new online systems are necessary to handle the varying information to be collected. Similarly, state personnel need appropriate training to assist foreign taxpayers.

Cost of compliance

The headaches of registering for sales tax pale in comparison to determining how to collect sales tax across 45 states and the District of Columbia. In Wayfair, the Court commented that filing and remitting sales tax would not be overly burdensome, noting that under South Dakota's $100,000 in sales or 200 transactions standard, nexus would not apply to small businesses with few sales to the state, and that software solutions were, or would likely quickly become, available that would simplify compliance and reduce the burden on taxpayers with South Dakota nexus. For a business selling only taxable tangible products in the home décor industry via an online shopping cart, that conclusion is most likely valid. Even online shopping carts have inexpensive modules that can be added to collect the appropriate sales tax when customers check out online, and if all products to all customers are taxable, the solution can be easy and affordable to implement. But for businesses with complicated invoicing through large enterprise software solutions with products that can include tangible products, services on either tangible or real property, and software with varying access points and multiple types of customers, the cost of establishing an automated method of collecting sales tax can be expensive and disruptive.

Once a business considers complexities of varying taxability rules among dozens of states and varying customers that could be exempt or nonexempt, the options for automating sales tax narrow quickly to only a handful of software providers. To license and employ these solutions for sales tax collection, costs can range from approximately $20,000 to hundreds of thousands of dollars every year. Additionally, the upfront software implementation, configuration, and accompanying internal process changes can take months. Only the largest businesses can absorb the impact of this solution effectively.

Example: A relatively new business sells food and nutritional supplements both online to end users and to private schools or public colleges via sales representatives. Assume that in just the third year of business, the company's sales are $2.4 million. Also assume that an analysis of the physical presence of its sales representatives' activities combined with its sales by state concluded that the business was required to register, collect, and remit sales tax in 22 states. Establishing this process could require the following:

Taxability determinations: Food products are one of the most inconsistently taxed items throughout the states. While most states exempt "groceries," each state has a different definition of what is a "grocery" versus a nongrocery product. For example, in California, a protein bar might be a "food product" and not taxable, but protein powder is considered a food supplement and is subject to tax.5 In Georgia, complex rules govern whether delivered and prepared food is fully taxable or subject only to the local rate of tax and not the state rate.6 For the business in the example above, navigating these rules across 22 states most likely would require the services of an in-house or third-party sales tax professional, at significant expense to the business.

Managing exemption certificates: Another consideration for the example's business is that sales to schools could be exempt from tax either because the sale is for resale to students or, even if the school is providing the meal free to students, the school is an exempt entity for sales tax in the state. If the school is reselling the food, the business's process is much easier, as most states' resale certificates are fairly straightforward, and most states will even accept another state's resale certificate.

Determining exemptions based on the purchasing entity, however, becomes much more complicated. Some states exempt all educational institutions, while some exempt only public schools. Not all states exempt not-for-profit schools. Even in states that do have broad exemptions for educational institutions, the type of certificate that is accepted can vary. For example, some states will allow sellers to rely on the original letter from the IRS to the not-for-profit school showing tax-exempt status, while other states have specific forms for tax-exempt entities.

For any remote seller, when these varying certificates across 45 states are combined with exemptions available for manufacturing, agricultural uses, state or local governments, and not-for-profit and educational institutions, a small business can become overwhelmed with determining which certificate is acceptable for which sales. Additionally, most businesses need to collect this information near the beginning of the sales or order cycle — steps before an accountant or tax professional is involved. Training sales or customer service professionals on whether a specific tax form is valid is vital in sustaining exemptions during a sales tax audit.

Software licensing and integration: In most software systems, the logic for the taxability based on the customer is typically stored in the customer relationship system. The logic for the taxability of the product in the various states may be in the product database or stored in a separate "taxability matrix" database. An additional database is required to store the tax rates across over 10,000 tax jurisdictions in the United States. Before sales tax can be added to an invoice, software must access all three databases to find whether the customer is taxable and whether the product or service is taxable and to determine the rate of tax in the appropriate state and local tax jurisdiction.

As mentioned above, the options for software providers that can perform the above functions are somewhat limited. For the business outlined in this example, off-the-shelf shopping cart software most likely can add the correct sales tax rate to products in a shopping cart by looking up the shipping address in a database, but not all software has the flexibility for programming which products are taxable in which states. Invoicing through an enterprise resource planning (ERP) system is even more daunting, as these systems may have easy "hooks" to a database for rate lookup, but, again, the logic of varying taxability across states is more difficult. For non-U.S. businesses functioning with ERP software in other countries, modules that can handle only value-added tax with a flat rate will not provide the functionality needed for U.S. sales tax without significant customization.

In the business described in the example above, the combination of implementing software that can ensure taxes are collected only from taxable customers and sales in the appropriate states on products that are not exempt in the state could cost over $50,000 in third-party or in-house employee labor costs, in addition to those of business disruption and recurring software costs each year.

Best practices for states to consider

Three years after the Wayfair decision, a number of jurisdictions still need to update processes and procedures to ensure their systems are aligned with new tax laws. Those that have been successful with encouraging compliance have kept the taxpayer in mind. These jurisdictions were able to create an avenue for foreign taxpayers to register for and begin collecting sales tax without compromising the integrity of the tax and registration systems. Some best practices for state tax authorities to consider include the following:

  • Cost of compliance: How much will it cost a business to come into and maintain full compliance?
  • Administrative burden: How much time and effort will be required to maintain compliance?
  • Realistic expectations: Using common sense as a barometer, are the state's expectations reasonable?

If a state is unsure of the next steps, the Streamlined Sales and Use Tax Agreement (SSUTA) is a good starting point. The SSUTA's mission is to establish uniform sales and use tax standards and to make the burden of compliance the same for all sellers through improved administrative procedures and updated tax collection technology solutions.

Generally speaking, the member states share common definitions and taxability treatments among themselves. Although there are differences among these states, the commonalities help to ease the compliance burden for taxpayers.

However, a state can apply best practices without being an SSUTA member. In Alabama, remote sellers with economic nexus collect a flat statewide rate regardless of the product sold.7 The required one-page tax return results in minimal administrative burden for remote sellers in Alabama.

In Texas, a remote seller collects a flat 1.75% for the local rate and can indicate on the return that it is a single local tax jurisdiction filer, which avoids the separate local jurisdiction reporting nightmare. The end result is another flat rate for all remote sellers, along with a very short and simple tax return.

Both Alabama and Texas employ all three identified best practices, underscored by a simplistic process, making it easier for taxpayers to comply.

Colorado and Illinois, however, are examples of what compliance looks like when these same best practices go awry. Colorado is a home-rule state with both state-administered and non-state-administered local taxing authorities. A remote seller can file the state-administered local tax returns as part of the state return, but this administrative burden should not be underestimated. A remote seller with significant sales into Colorado may be filling a monthly return in excess of 500 pages. That still does not address the fact that even the state-administered localities can define and set their own tax laws; therefore, each state-administered local tax must be treated like its own state.

Effective Jan. 1, 2021, Illinois attempted to level the playing field for Illinois sellers. A remote seller with economic nexus in Illinois is now required to register to do business with each taxing authority where sales are made. Although a business may not have to file separate returns for each locality, it is required to separately report them. The result is another excessively large monthly tax return. Just as in Colorado, the local jurisdictions in Illinois can set their own tax rules; therefore, each must be carefully researched and treated accordingly.

These examples illustrate the high cost and cumbersome administrative burden that taxpayers may need to bear to comply with sales tax requirements. That is not to say that compliance with other state tax types is always easier. Most taxpayers strive to remain fully compliant with all taxes but often struggle to balance this with the cost of doing so. States desiring increased taxpayer reporting may wish to consider employing the best practices outlined to reduce cost and complexity.

While businesses are accustomed to dealing with tax issues in multiple jurisdictions, few taxes have the complexity and compliance cost of U.S. state sales taxes. Businesses worldwide are adjusting to the ever-changing mandates to collect and remit sales taxes and file sales tax returns in the United States. Additionally, a growing number of authorities expect any business with a customer located in their jurisdiction to be aware of new requirements. This trend is not expected to slow. When taxpayers adjust their business models simply to avoid having to comply with administrative aspects of filing returns, or when complying with those administrative requirements impedes the growth of small businesses without adding any material revenue to the jurisdiction attempting to collect the tax, the requirements have become too burdensome. State tax authorities would find increased compliance and additional tax receipts by simplifying procedures and creating more uniform tax rules across jurisdictions.


1Haw. Rev. Stat. §235-4.2; Mass. Regs. Code tit. 830, §63.39.1; Pennsylvania Corporation Tax Bulletin 2019-04 (Sept. 30, 2019); 34 Tex. Admin. Code §3.586(f).

2Md. Code Tax-Gen. §§7.5-103 and 7.5-201.

3See also Vice and McGahan, "Tax Clinic: State Proposals to Tax Digital Ads Are Popping Up Everywhere," 52 The Tax Adviser 365 (June 2021).

4Philadelphia Business Income and Receipts Tax Regulation §103(C); San Francisco Business and Tax Regulations Code Article 6 §6.2-12 (Proposition D was passed as part of the Cannabis Business Tax, Article 30); Portland City Code Title 7, Chapter 7.02.100(N).

5Cal. Code Regs. tit. 18, §1602.

6Ga. Comp. R. & Regs. r. 560-12-2-.104.

7Ala. Admin. Code r. 810-6-2-.90-.02.



Bridget McCann, CPA, is managing director of State Tax at Grant Thornton LLP in the Philadelphia area. Jeff Dorris, CPA, is the SALT Practice leader at Mauldin & Jenkins CPAs & Advisors in Atlanta. Lee Fritts, CPA, is a partner with Rödl & Partner in Atlanta. Ms. McCann is the chair and Mr. Dorris and Ms. Fritts are associate members of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact


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