Menu
Tax Notes logo

Wells Fargo Adjusts Income Tax Reserves Following Wayfair

Posted on July 23, 2018

Wells Fargo has adjusted its state income tax reserves following the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc., in a move that could herald similar adjustments by other companies.

CFO John Shrewsberry said July 13 that the company’s $5.2 billion second-quarter earnings included a $481 million net discrete income tax expense that was mostly related to state income taxes and driven by the Wayfair decision. “While the ruling addressed whether a state can require an out-of-state seller to collect sales taxes or use taxes even when the seller lacks an in-state physical presence, it has an income tax implication as well,” Shrewsberry said during the company’s earnings call. “Following the ruling, some of our affiliated entities may be considered to be taxable based on an economic presence in the state, even if they have no physical presence in the state.”

Shrewsberry added that Wells Fargo’s effective income tax rate increased to 25.9 percent in the second quarter from the expense, but that it expects its effective income tax rate for the remainder of 2018 to be “approximately 19 percent, excluding the impact of any other future discrete items.”

According to a July 13 release, the $481 million net discrete income tax expense also includes the “true-up of certain state income accruals.”

In Wayfair, the Supreme Court held June 21 that the physical presence standard for sales and use taxes set out in Quill Corp. v. North Dakota was “unsound and incorrect.” Though the decision applies to sales and use tax nexus, state corporate income taxes could also be implicated, with many states having laws subjecting companies that exceed a specific threshold of sales into the state to their corporate income tax — or its equivalent.

Leah Robinson of Mayer Brown said her firm has been hearing from “a number of companies who are trying to figure out what to do with their reserves — both sales tax and income tax.”

Robinson said state departments of revenue and courts had said for decades that Quill was limited to sales tax, so “now, taxpayers should be able to say the same thing: Wayfair has no impact on income tax nexus determinations, since it was interpreting the sales tax standard for nexus.”

“As a defense for income tax assertions, there are different due process and other concerns that weren’t addressed by Wayfair,” Robinson said. “So, while we definitely expect to see an uptick in state aggressiveness regarding income tax nexus, taxpayers shouldn’t just roll over if their in-state presence is de minimis or economic only.”

Declining to comment on Wells Fargo’s situation specifically, Valerie Dickerson of Deloitte Tax LLP in an emailed statement said that “Quill, and thus the physical presence standard, has long been thought to apply for determinations of substantial nexus for state income tax purposes, as well as sales/use tax purposes,” and that Wayfair “could affect companies that relied on the physical presence standard for a ‘no nexus’ determination for income tax purposes.”

“That doesn’t mean these companies are automatically subject to tax,” Dickerson said, adding as an example that “Public Law 86-272 still operates to limit states’ jurisdiction to impose an income tax based merely on solicitation of sales of tangible personal property.”

“In any event, it should not be surprising that some companies may need to re-evaluate their ‘no nexus’ positions for income tax purposes taking into account their facts, applicable state statutes and theories available under the various authorities,” Dickerson added.

Steve Wlodychak of EY, also commenting generally, told Tax Analysts that “historically, there were a number of states that have never issued a decision on ‘economic’ nexus with the state or have a bright-line doing business standard for income tax purposes, and taxpayers could have reasonably concluded that they did not have a tax filing obligation in the state even though they had revenues derived from that state.”

Wlodychak said that “if a return was never filed, the statute of limitations has never run, and theoretically a state could go back to collect taxes from the date that the business had the requisite receipts from the particular state.”

Emily Foster contributed to this article.

Copy RID