Navigating the Post-Wayfair World
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week, way finding after Wayfair. In June, the Supreme Court released its ruling in South Dakota v. Wayfair. The ruling did away with the physical presence test for determining when an online retailer must collect and remit sales tax to the state of its customers. State Tax Today reporter Paige Jones has looked into the complications this creates for retailers and talked to an adviser who is helping clients navigate this new reality. Paige, welcome to the podcast.
Paige Jones: Thanks for having me.
David Stewart: So, who did you talk to about this?
Paige Jones: I talked to Jim Ford from Global Tax Management. Jim is a managing director in GTM's state and local tax practice, where he specializes in developing and implementing tax information reporting systems. In our interview, we talked a little bit about what states are doing post-Wayfair and how retailers are preparing to collect and remit sales and use taxes.
David Stewart: Well, let's listen to that interview. Now, before we begin, I should warn listeners there may be some noise in the background. There was a bit of a — would you say an apocalyptic thunderstorm going on outside, while you were talking to Jim?
Paige Jones: I would.
David Stewart: So let's get to that interview now.
Paige Jones: Here with me today to discuss this new post-Wayfair world is Jim Ford from Global Tax Management. Welcome, Jim.
Jim Ford: Thank you very much, Paige.
Paige Jones: So, to start things off, Jim, can you tell us a little bit about what you do at GTM and how the Wayfair decision has affected your company and your work?
Jim Ford: Yeah. You mentioned I'm a managing director in our state and local tax practice. Sales and use is an area of focus within the state and local tax practice at GTM. Most of our clients are large multinational corporations that do business in multiple states, so we help our clients with what I call the day-to-day operations in the tax department. We take a — I call it a very practical approach to help our clients kind of navigate the complexities of sales and use tax and really help them come up with solutions to some of those challenges. Sometimes there are one-off projects that we may help a client that needs maybe a system implementation or needs to think about how they are going to actually do their compliance, once they go live. Other times, it's more of — we may partner with our clients long-term and help them with various things in sort of streamlining or helping them execute these day-to-day processes around sales and use tax. So, we really help with what I call the best practices around tax compliance and tax calculation.
And those are the two things to me that have been most impacted with the Wayfair decision. The idea of, well, tax compliance — now I may have to register and file in a lot more jurisdictions. And then the idea of if I do need to register and file, how do I do that tax calculation now in 50 states, where maybe I only worried about it in 3 or 4 before. So, it's really impacted our clients, and it's really been a ripple effect, and we've seen a lot of clients now start to kind of take note and think about what do they now have to do for next steps.
Paige Jones: So, what's the first question that you've seen from clients since the Wayfair decision? What was the biggest and the very first question after that decision came out?
Jim Ford: The big question was really kind of, what's next, right? We're dealing with sales and use tax, so it's administered by all the individual states, right? So, you have the Supreme Court of the United States has a decision that impacts now these really 46 different states that have traditionally had a sales and use tax in place. So, the first thing that really clients are thinking about is, okay, now that this decision has come down, what are really the states going to do? Are they going to go retroactive, are they just going to look prospective? What are these new rules going to look like? What is that new bar from nexus going to look like? So that's really the first thing that they’re thinking about is, now that this decision has come down, what are the states going to do next? What is really that next step that they're going to do?
Reporting requirements are one thing that we're focusing our clients on. There were seven states that even prior to the decision had already implemented reporting requirements. And that's something that if you thought maybe they were kind of on shaky grounds before, with the Wayfair decision now they're pretty solid. And a lot of companies were — they kind of knew about those, but they really didn't think about them or implement them because they knew, well, there's another shoe to fall. There's this case that's going to get to the Supreme Court, and that may change all these rules anyway. But now with this decision coming down, if you are doing business in one of those states, and you haven't considered those rules, that’s the first thing I'm telling our clients. Look at those states that have already implemented those rules. If you are doing business in one of those states and you are not registered, do you have a reporting requirement in that state? Is there something else that you need to do or think about in terms of whether it's just the system side or just thinking about how you do business. That's really one of the first things.
The second thing is registration. There are states that have now — they have guidance and they’ve started to think about and even send letters out to their different taxpayers. I've seen some letters come from various states that always kind of almost sound like you should register, but that's the next thing that our clients are thinking about. Are there some of these affiliate nexus things that maybe were gray areas before that from a business decision, they may have decided not to register and now they're looking at those things a little bit more closely.
And the third thing is one of the things that I alluded to a moment ago, which is the tax calculation. They're thinking about that now. The states still haven't come out with their definitive guidance, not all states have, but the real implication in their mind is, if I do need to charge sales tax in multiple states, that have many different tax rates — state, county, city, maybe even district level taxes — how am I going to do that? And that's the next thing that's kind of on their mind is, you know a project like that might be a pretty big project, I might need some lead time for that, we might need to think about that. And they're really the first three things that when we talk about this we're kind of focusing our clients on. First, the reporting requirements. Second, registration. Were there any areas before that maybe you made a business decision not to register that maybe now makes sense to register? And the third thing — just they're starting to think about, if I do need to implement, how would I do that, and really, how big of a project would that be?
Paige Jones: So, we've seen a couple states come out with an October 1st collection start date. For clients in those states, what are you advising them at this point? Are they voicing any kind of worry?
Jim Ford: Yeah, there's a lot of discussion around October 1st. Like I said, if a big company that really has been doing business in multiple states, but maybe only had physical presence in a couple of states before, now decides that, hey, they should be collecting and remitting sales tax, it's a challenge to do a project like that in a short period of time. When you're talking about — the sales tax has to be real time kind of event, right? The invoices get created. When we think about use tax, we can sort of do it at the end of the month, it's a batch process. But sales tax is real time. When I invoice my customers, I need to calculate any sales and use tax that's due. And that has a lot of impact in the business, right? Because we're not just talking about tax people getting involved. We're talking about AR, we're touching the invoicing, we've got accounting involved. So those projects generally have a lot of different stakeholders inside of an organization. And it's difficult to make change in large organizations in a short period of time, especially when there's a lot of stakeholders involved. So yeah, they are — I have clients that are a little bit worried. They're starting to think about what are the different approaches that they can take. They are starting to look at software solutions in some cases, in other cases they are looking at their ERP software to kind of realize, well, what's built into there. What can we easily implement quickly, and are there some areas that we might be exposed for a little while?
Paige Jones: And so, another part of this discussion — and we've seen it come up a little bit during the oral arguments before the Supreme Court, and we saw it most recently in the congressional hearing — is the cost of the software and the cost of tax compliance. There was some discussion about it being too costly, about it being too much for small businesses. And I know you've mentioned that you've worked largely with multinational and larger businesses. So, from your perspective, is this financially feasible?
Jim Ford: Yeah, it can be, right? So, there are different levels obviously and there are different ways that companies can kind of face off on really how to collect sales and use tax. In my mind, you really have three different options when you are thinking about, what are the ways systematically that we can collect sales tax. Inevitably today, even if you're not collecting, you're invoicing somehow, someway. And in general, most invoicing systems that I see have this element of sales tax built into it somehow, someway. It may be very rudimentary, it may be something as simple as like a two-dimensional table where I can assign tax rates to my customers that are in the system. And then when I generate invoices, it uses that tax rate to calculate them. So, there are some simple solutions out there. Inevitably, whatever you're using to invoice today most likely has some sort of at least a rudimentary type of sales tax calculation module built into it. And if you're doing business in a few states — I always use the example of the Northeast. If I'm doing business in Pennsylvania, Maryland, and New Jersey, it's pretty easy to implement. I've only got a handful of tax rates to really manage there. I can probably stay on top of the changes in those four or five states. And therefore, maybe even manually update my tax rates in whatever system I'm currently using for my invoices. So that's really a pretty low-cost solution, and if you’re business, even if you are a midsize business, doing business in four or five states, you might be able to utilize your existing ERP or whatever you are using for invoicing and build those tax rates into there, and that might work perfectly well for you. And that's one solution, so it's possible.
Now, if you’re a business that then has to go and maybe make sales into Texas, into California, you get into some of these other states, they have four different layers of taxing — state, county, city, and district. And you've got many different cities and many different counties, it just is not feasible to try to manually maintain that information. You might be able to get it in there one time — that's a big project, but unfortunately, the tax rates are changing all the time. So now you have to maintain that.
The second area that we kind of talk about in terms of implementing a solution like this is, well, if you have that, what I'll call tax calculation module built into whatever is generating your invoices today, you might be able to purchase the tax rates, and we call that the content. So that's another way to face off. And it's a way that, again, it might not be a whole new system implementation, because you might leverage your existing systems. But by adding that content, you've now streamlined the process a little bit. You're not worrying about manually maintaining tax rates. And, you know, the numbers always vary, but it's somewhere around, depending on who you talk to, about 3,600 different tax rates when you add up all the states, the counties, the cities, and the districts of the United States, right? So, it's a lot to maintain, but a content solution can help, and that's a little bit more cost effective because, again, you may be utilizing your existing system, but injecting some sort of content from a third party and then just updating that on a monthly basis.
The third level, and this is really the one that people kind of use as the example, it's like everything else. We always come up with the scariest example to kind of make our point. And that's the, what I'll call the tax engine. That's what the big multinational businesses are using. That's when I have some ERP that's running, but that rudimentary tax calculation engine isn't going to do it for me, so I actually purchase third-party software and then integrate that with my billing system. And then that system acts as effectively like a black box, if you would, that has all the rules, has all the rates built into it. And then my transactions just go back and forth between that system, get tax affected, and then flow out of my invoice system. That's the one that a lot of people use and say there is a lot of implementation cost.
I even remember doing one of the arguments, I think it was Sotomayor who brought up $200,000 — I was thinking she's thinking tax engine there. And that is a big undertaking because, again, that's going to be a big IT project. We are going to be touching our invoices, we are going to be integrating with whatever ERP we have. It can be a pretty big undertaking. Now there are also different levels of those solutions out there, so you have the ones that are the biggest solutions, have all the U.S. and maybe even VAT rates built into them. Then you've got more mid-level solutions that are more designed for the mid-level ERPs. And they might even have canned integrations. So, it might not be so much that we have to build a custom integration, there may be a canned integration out there for those types of solutions. And that will make it a little bit more cost-effective.
There's a third level, which is a cloud-based solution. And a lot companies will leverage — their solutions are in the cloud, their ERP is in the cloud. And there are a lot of cloud-based solutions that act as a tax engine but integrate a little bit easier because they may use some technology that kind of lends itself to easily integrate with other point-of-sale systems or ERPs. So there is going to be some cost involved. The level of the cost, it really depends on the business circumstances. If you're a business with an ERP and doing business in five or six states and can manually update those rates, your cost may be pretty minimal. You might have a little bit more on the compliance side now, right? Because if you have to file some returns that you didn't have to file before, that's an administrative burden. But the good news is that a lot of states still do have quarterly, semiannual, annual, even, filing frequencies. So it may not be a monthly exercise that you have to do. It may be something that — yeah, you’re registered, you have to file a few more returns — but depending on the level of your sales, it may just be a quarterly exercise that you have to do four times a year.
So, there's definitely some cost, but it really depends on the business circumstances and on what your requirements are from a business perspective. And there are lots of solutions out there, but the key for me is kind of looking at those requirements from a business perspective and then finding the right solution that fits those needs, but is not necessarily overkill all the time. And that's the key — not everybody will need to implement a full tax engine. That would probably be overkill for a lot of people. For some companies, your requirements are going to dictate that you need that. But for other companies, you may be able to face off on your existing software and just kind of adding a little bit more of that logic or content for tax rates into there.
Paige Jones: So there's been a lot of numbers thrown out about how much this will cost. Can you give us a little bit of a range of cost?
Jim Ford: Yeah, I mean I can tell you that for the largest multinational corporations that are going to implement a tax engine — and we're talking a billion dollar company that's doing business in multiple states — that project is probably going to be north of $300,000. The software alone for a company that size may be a $100,000-a-year license. And then the implementation cost around that may be another $100,000, $200,000, depending on how much is streamlined and how complicated the profile is. Sales and use tax really varies. There are certain products and services that are very black and white — this is taxable, this is not. And then there are other ones, when we get into software, hardware, software as a service, these things become very complicated and hard. There's even states that have thresholds for certain things. So, it really, most complex one, those projects can become very expensive. I've seen projects implemented at even pretty large companies for well less than six figures. I mean, we've seen projects, we've seen companies implement solutions, $20[,000], $30,000 all in — software licenses and integration and testing and all that stuff. It really depends on the requirements. A bigger project, if you're implementing a tax engine for both the order to cash side on the sales tax, and you're looking at procure to pay, trying to automate some of that use tax on the AP side, those are very big projects. If you've got an ERP that you buy, a cookie-cutter ERP, it's not a home-built system, and there's an integration out there to a cloud-based tax engine, they are almost plug and play where you can pay for the licenses, implement that software, and go live for the tax engine.
So it really does vary. But the key to me is — it's the requirements, not the company size per se — but your requirements from the business in terms of sales and use tax. How many things do we sell? How complex are they? How much does the taxability of those products vary? Even your customers themselves can have an impact on that. If I sell mostly to exempt customers, even though I may have to register, I might not have to collect sales tax at all. And that's the other key that I'm talking about with our clients. Wayfair decision is about nexus — doesn't change the taxability of things. So, you may be a distributor — now you have to register. All your sales are for resale. So you don't have to worry about the tax engine part because all your sales are still going to be for resale. I may have to register now and report to the state, but I'm still in the business of resale and it hasn't changed taxability. It's really just changed how we define nexus and when a state can compel us to register and collect its tax.
Paige Jones: And so, for another range, how fast can all the software for this compliance be built in terms of getting a company ready to start collecting and remitting sales and use tax to states?
Jim Ford: Yeah, that's a good question, because when we talk about projects, we always talk about really two time frames. You've got your project input time — that's how much time we're physically going to spend working on this project. Is it 40 hours, is it 100 hours, is it 300 hours? And then you have project duration, which is from the start date to the go live date — what is that actual time frame? And these tend to be on the longer side of the project duration. Because of something I mentioned earlier, there is genuinely a lot of stakeholders involved, right? When we are doing things in the tax department, we are doing things with our tax software behind the scenes. It doesn't impact anybody on the front end of the business. When I start touching the invoices — this is how we generate our revenue, this is how we communicate with our customers — there's a lot of stakeholders involved. And that's why that project duration in general can be longer than it normally would when you compare it to the project input time. We may only spend 40, 60, 80 hours kind of implementing and configuring the system. It may not go live for three months because we may go to multiple layers of testing to make sure that the billers understand how the system works. We can't hang up invoices. If we integrate a system with our invoices and invoices don't go out, that would be a major issue for any company. So, the project duration does vary. Again, I've seen projects that literally will take over a year to implement because of the complexities, the number of businesses. They may even be consolidating different systems at the same time as doing that implementation. I've seen other ones go live in 45 days, because if you have one of those integrations that's basically a plug and play, you’re a midsize company, you kind of know your taxability, what the rules are, it's pretty straightforward. You can integrate, you can do testing, and you can go live in 45 days.
So again, the project duration usually is longer when compared to the input time of the project because we're touching the invoices. It's a real-time process. We've got multiple stakeholders — accounting, AR, tax, a lot of people involved. And the testing is critical when you're doing something like this. This is not something that you take lightly and then you can't run invoices for two days. For a company that can be very — I've seen that happen to clients before, where all of a sudden, it's like, well, we didn't really do a lot in sales this month, but not because we didn't, but because we couldn't, our systems were down. And so they can go anywhere from 45 days. I've seen them take up to 8 months, sometimes to a year, when there's a lot of complexities and a big implementation that's going along with that.
Paige Jones: So given all these issues and complexities since the Wayfair decision in getting companies up and running to collect and remit sales tax, if you could ask anything of the states, what would you ask them?
Jim Ford: Wow. So the challenge is that you see with the states is a couple of things, right? One is the fact that there's no uniformity on taxability from state to state. And there's been lots of initiatives and there's been lots of commissions, and there's been a lot of groups of states that have gotten together and tried over the years to make that more uniform. But that's a key thing for me, is part of this complexity is not just the tax rates themselves, but the fact that taxability really varies a lot from state to state. When you look at certain industry software, it's a challenge right now. Software companies, it's a real challenge to determine when you should be charging sales tax. Is it cloud-based software, is it a user-based allocation? Is it where the server resides? Is it where the users are sitting? Every state is coming up with different rules. That's a challenge. And if that was one thing, I would say, that somehow if I had my wish list, that would probably be on the top of the list.
The second thing would be home rule reporting, which is a real challenge. And that's one where, we are talking about 46 states, but it’s really much more that 46 states. There are still several states in the union — Alabama, Colorado, Louisiana — that allow what we call home-based reporting, meaning not only do I have to register with the state, I may also have to register with a city and a county.
So now, an example of Alabama, I might do business in one city. I might have to file three different tax returns to three different taxing authorities to be in compliance, and that is another challenge. When we talk to comptrollers, when we talk to VPs of tax, tax directors, everybody wants to be compliant for the most part. Nobody's out there saying, hey, we're trying to avoid wherever we can. They want to be compliant. The challenge is, hey, we'll register with the state, the state collects the local tax, that's great. If I have to register with 40 different cities and 40 different counties, my burden is now not just twofold, or maybe threefold, or fourfold.
That's the second thing I would say to the states, is we have to somehow try to resolve the burden of home rule reporting. It's a major challenge, and it's one that our clients are struggling with. Everybody's okay with, fine, Wayfair decision, no physical presence, economic nexus. That makes sense in the world today. But I can’t file 100 Alabama returns every month. That is difficult. So there are the two things, is the complexity, the uniformity, if there could be some uniformity around the taxability of products and services, that is a real — that would make this problem a lot easier to solve. And secondly, on the compliance side, we still have states that allow the home rule reporting, and there’s been some more even popping up within the last couple of years. A few more states, and we can't just pick on Alabama, Colorado, and Louisiana anymore. We've got them in West Virginia, we've got them in Washington, we've got them in Alaska, they're everywhere. And that is a challenge because, again, it's one thing to have one system charges the combined tax rate. If I have to take that now and break it into three returns, my compliance burden is a lot more difficult when I have home rule reporting.
Paige Jones: And so as your clients are beginning to work with the states as these start dates are coming up, what are the responses, what is the flexibility you're seeing with the states so far, or that your clients are seeing?
Jim Ford: Yeah, so far what we've really seen is that we haven't seen anybody look retroactively, which is a big thing, right? That was a big fear, and that's also why maybe Congress needed to be involved, is that we want to make sure that the states don't get super-aggressive and try to go retroactive on this thing. And we haven't seen anybody do that yet. What we've really seen is kind of more of this solidifying the reporting requirements, we've seen that. We've seen some states, obviously, come out with some guidance. And we've seen some states come out with what I'll call — I’ll call them the letter campaigns. Now that Wayfair has kind of got sales tax on the top of people's minds, you get a letter from a state saying you might — and all of a sudden now that's really what you're thinking about now. So those are really the things that, like I said from our clients, that's the next thing that's on the top of their minds is really thinking about those things.
Paige Jones: And going back to retroactivity for a moment, is that a real fear on your clients' part? Or is that something that's sort of in the back of their mind of, this may come up, but it's not as probable?
Jim Ford: I think most people think it's not as probable at this point. I haven't seen a lot of fear around that. And it's been talked about a lot, and it's been talked about a lot in the committee meetings. And it's been talked about a lot, obviously, during this whole Wayfair case. And it seems to be that that's the one thing where Congress is kind of hanging out there, saying, well sounds like we don't have to do anything unless we hear retroactivity, then we can — and at least Congress holding the states out like that, I think has helped. And our clients hear that, and the states — it just seems to make sense to go prospective and not retroactive. We'll see. Nothing will surprise me when it comes to the states, because there's just a lot of different opinions out there. It's politics in some cases.
So, it's not a huge fear, but it's on the back of people's minds, and to me, it would be a major challenge. These are indirect taxes, right? Sales tax is not really a tax on the business, we are just responsible to collect and remit it to the state. It's a tax on our customers. And you have to think about those implications, because if we did go retroactive, could businesses now then go retroactively charge the sales tax to people? According to the terms of the invoices, a lot of them can. That might be a customer service issue, so they may not want to, but you can imagine the trickle-down effect of retroactivity. Now, you're not only impacting the businesses. The people who vote are sitting here now, “I'm going to get a sales tax bill for something I bought a long time ago?” That's a nonstarter for a lot of people, so I think it's been talked about enough, and I haven't seen a real fear of that out there.
And a lot of companies, like I said before, they want to be compliant. So, if they had a big area of exposure, these VDA programs that have been out there in the states — that's been a big thing the last five years living in this gray area of before Wayfair and post-internet — the VDAs have kind of been out there as a vehicle. So, companies that really feel like, hey, if I really had a lot of exposure, they probably already at least entertained the idea of VDA to minimize their exposure. And retroactivity, I think it's unlikely and it's talked about, but not a real fear in my client base.
Paige Jones: Thank you for being here, Jim.
Jim Ford: Thank you very much.
David Stewart: Well, Paige, that was a great interview, thank you for doing that.
Paige Jones: Not a problem.
David Stewart: Where can listeners find you online?
Paige Jones: You can find me on Twitter @paigeleejones, that's P-A-I-G-E-L-E-E-J-O-N-E-S.
David Stewart: Thank you for being here.
David Stewart: And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes, Robert Kane Jr. explores timing issues regarding the liquidation of partnerships, including whether the relevant case law and letter rulings have established an asset threshold for when those partnerships terminate. Also, practitioners from Baker & McKenzie discuss circumstances when the IRS has granted relief to a taxpayer that has missed a regulatory or statutory REIT-related election.
In State Tax Notes, Lynn Gandhi highlights a few recent Michigan excise tax refund cases and provides some guidelines to assist taxpayers in proving a refund claim. Additionally, McDermott practitioners respond to Lee Sheppard’s recent article urging states to tax global intangible low-taxed income, with the authors arguing that it should not be taxed for pragmatic and constitutional reasons.
And in Tax Notes International, two tax professors address outstanding questions stemming from a June decision by the Court of Justice of the European union, which reassessed the compatibility of member states’ domestic transfer pricing rules and EU law. Also, Nathan Boidman discusses draft tax legislation that would implement several changes to Canada’s Income Tax Act.
David Stewart: You can read all that, and a lot more, in the September 17th edition of Tax Notes, State Tax Notes, and Tax Notes International. That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at email@example.com. Be sure to subscribe to us on iTunes or Google Play to make sure you get the next episode of Tax Notes Talk.
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