August 2018 eNewsletter
The Wayfair Decision – How Will It Affect You and Your Business?
Chris Freeman, Katz Teller
On June 21, 2018, the United States Supreme Court issued its highly anticipated opinion in South Dakota v. Wayfair, Inc., et. al., a case closely watched by tax professionals due to its expected impact on thresholds employed by state tax authorities to determine when, and if, retailers have established nexus with their state for sales and use tax compliance purposes. In Wayfair, the Court issued a 5-4 decision eliminating the “physical presence” rule of prior Court precedents Quill Corp. v. North Dakota and National Bellas Hess, Inc. vs. Department of Revenue of Ill, and thereby dramatically altered the sales and use tax landscape – a development that, directly or indirectly, will impact nearly every seller and consumer.
Now, more than a month later, what are the practical effects of this decision? What, if anything, should companies with an online presence and/or multi-state operations be doing to prepare?
What did (or will) the Wayfair decision change?
In general, under prior law (the aforementioned Quill and National Bellas Hess cases, among others), state jurisdiction regarding sales tax depended on the substantiality of a potential taxpayer’s physical presence in, and connections with, a state. Prior to Wayfair, application and enforcement of these thresholds had long been subjective and inconsistent among the states and therefore unwieldy for both state governments and taxpayers.
In Wayfair, the Court considered a newly enacted South Dakota statute that required ‘economic nexus’ for sales and use tax collection purposes rather than a specific physical presence. According to the relevant South Dakota statute, economic nexus exists (and therefore a seller must comply, by collecting and remitting sales tax) when either (1) the seller’s South Dakota sales of goods or services exceed $100,000; or (2) the seller engages in more than 200 separate transactions for the delivery of goods or services in South Dakota. Upon reaching either threshold, a seller must comply with South Dakota sales tax laws.
The Court considered South Dakota’s economic nexus thresholds in light of constitutional Commerce Clause principles regulating interstate commerce – under which principles Quill’s physical presence test had become the standard. Ultimately, the Court determined both that:
- The physical-presence test was an invalid interpretation of the Commerce Clause (thereby overruling that standard), and
- South Dakota’s thresholds for economic nexus passed constitutional standards.
In making these determinations, the Court has presented a clear path for states to reconsider when a potential taxpayer should be required to collect and remit sales tax based on the materiality (and/or regularity) of business activity in a state. However, and importantly, the Court did not expressly determine what those standards should, or could, be – those matters will now be determined by state legislatures and potentially, Congress.
What to expect.
The Court’s Wayfair decision will result in states reconsidering and likely, redefining, nexus standards for state sales tax purposes using economic materiality thresholds. We expect that states will move quickly to implement new regimes which define nexus in accordance with, or similar to, the South Dakota statute at issue in Wayfair – on economic terms rather than dependent upon a physical presence. That said, physical presence may likely remain one manner of establishing nexus within a jurisdiction. It’s possible that Congress (which has considered legislation on this issue before) may also become involved, which could result in application of a uniform standard with respect to nexus.
Could ‘new’ nexus standards be applied retroactively?
In general, tax statutes are very rarely applied retroactively, especially when such statutes establish new standards for their application. Almost certainly, a new statute that purports to apply retroactively would be subject to intense legal challenge and scrutiny, including because such an application would be unfairly punitive to those affected, not to mention burdensome on commerce.
What should multi-state and/or companies with an online presence be doing?
The Wayfair decision will expand the universe of companies subject to tax in multiple states due to the prevalence of online sales. Companies that previously relied on a lack of physical presence as a bar to state tax collection and remittance should be consistently monitoring efforts of state governments to redefine and implement state tax nexus. Other affirmative compliance measures (i.e., proactive registration, collection and remittance in some states) may be warranted in certain circumstances.
Overall, remaining in touch with your tax professional(s) is highly important as these matters evolve to ensure that you and your company are prepared to comply with new standards when implemented.
Worried About Tariffs? Find Out More About Foreign Trade Zones
Patrick J. Hinker, CPA and Eric J Schnieber, CPA/CFF, CFE, Clark Schaefer Hackett
If you are an importer of raw materials, component parts or finished goods, you may be concerned about how the current administration’s proposed import tariffs may impact your business. Through a series of announcements earlier this year, the White House has proposed tariffs on approximately 1,000 products, ranging from solar panels and washing machines to steel and aluminum. While imports from China have been a specific point of emphasis, those from Canada, Mexico and the European Union have been targeted, too.
What can importers do?
While the notion of tariffs may have importers worried, there may be ways to defer, reduce or even eliminate the associated customs duties. Have you heard of a foreign trade zone (FTZ)?
An FTZ is a designated, restricted-access site in the U.S. that is legally considered outside of customs territory for the purpose of duties and taxes. Goods can therefore be imported into the FTZ duty-free and without formal customs entry. Tariffs and duties are paid only at the time that goods are transferred out of the zone for U.S. consumption. For those goods that are re-exported from the FTZ (i.e., they never enter the U.S. economy), it is possible that no duties will ever be owed.
Companies can establish a designated FTZ within their warehouse or facility, and products imported into the zone can then be mixed with U.S. sourced goods. Some of the activities permitted inside the zone include manufacturing, assembly, repackaging, processing, and relabeling (among others). These processes add value to the product and may allow FTZ users to elect the lower duty rate applied to either the foreign inputs or the finished product manufactured in the zone, often resulting in a reduction of duties (also called an inverted tariff).
One current situation negatively impacting U.S. companies’ use of the FTZ relates to Section 301 of the U.S. Trade Act of 1974. Section 301 creates a “privileged foreign status” for certain imports. Any “privileged foreign status” goods entered into an FTZ will be subject to the tariff rate applicable for that good. In other words, Section 301 eliminates the ability to use an inverted tariff for imports.
Most manufacturers and distributors aren’t fully aware of FTZs or the cost savings they can offer. To determine if a FTZ is a good fit for your organization, you’ll want to consider your level of international trade, specifically the volume of imports. You will also want to work with professionals who can help you through the application, implementation, activation and approval phases.
Tony Kure, Portfolio Manager, Johnson Investment Counsel
It’s safe to say most people have seared into their memory a few important numbers: Social Security number, home address, phone number, kids’ birthdays and wedding anniversaries (hopefully). Most people can also rattle off a few important financial numbers: annual income, account balances, how much they are saving, sometimes even the monthly mortgage payment.
However, one number that is critically important to financial success is underappreciated. What is this overlooked and often unknown number?
Annual Living Expenses
In short, this number is often the key variable in assessing one’s financial situation. The Number is especially critical in determining the viability of retirement and legacy planning.
Despite its importance, it has been our experience that this number remains elusive, usually for two reasons.
First, The Number is a difficult one to discern because of the dizzying number of daily transactions occurring in various accounts (checking, savings, credit cards, retirement, etc.). Tracking all this movement of money is tedious at best and impossible at worst. It is obviously not how most people want to spend even one minute of their valuable free time.
Second, knowing The Number can be psychologically uncomfortable. Some people would rather not face the reality of how much they are spending. Subtracting expenses from income could result in a negative number, an unavoidable proof illustrating spending is too high, and fat must be cut somewhere. Such an unpleasant experience is painful in the short-term. But once the initial sting passes, this exercise can lead to necessary conversations.
Despite the practical and psychological challenges with confronting The Number, it is the cornerstone of a working financial plan. So why is this so important? What can The Number tell us at various stages of life?
1) The Working Years: The Emergency Fund
Knowing how much you spend each year allows us to plan for establishing a solid base of liquidity, sometimes referred to as a “rainy day fund,” or an “emergency fund.” This cash position serves as the cornerstone when constructing a customized investment portfolio. Before deciding on an asset allocation, risk tolerance, etc., it is wise to set aside between six and twelve months of living expenses in a liquid, accessible account.
Having this base of available cash can save money on two fronts. First, having sufficient cash available prevents the use of “bad debt” (i.e. credit cards) to fund an emergency. Surprise expenditures like these are a question of when, not if. It also prevents the need to “sell low” less-liquid investments (stocks, rental properties) when the inevitable emergency expenditure rears its ugly head. Second, this fund can help reduce the costs of insurance. Health, auto, and home insurance policies can be structured with higher deductibles, which usually lowers the premiums associated with protecting against these risks. This is the same concept as working capital in your business.
2) Pre-Retirement: Tracking Progress Toward Retirement and Other Long-Term Goals:
When we have a good handle on cash coming in relative to cash going out we can then calculate how much is available to save for retirement, college, and other long-term goals. Without knowing this number, we have no way to know how much we can or cannot save. Once spending is detailed, it may become apparent how much cash flow is “unknown” and in all likelihood, wasted.
3) Approaching Retirement: When Can We Retire?
The more accurate the estimate of The Number, the more confidence we will have in answering that critical question – “When can I retire?” Sometimes, the answer isn’t pleasant. This is the case when a gap exists between retirement cash flow projections and living expenses. This may create the need for a few more years of working and saving. As unpleasant as this result is for some, it’s much better than the alternative - a painful reduction in lifestyle in what are supposed to be the golden years. Happily, for some this calculation provides the necessary assurance that the nest egg and other sources of income will be enough to take that next step.
4) Retirement: Confidence in Sustainability
During the retirement years this number becomes critical. The Number guides the discussion of risk tolerance and asset allocation. It is a necessary input in answering the question: “Will we run out of money?” There are many things out of our control: the economy, the markets, tax rates, medical costs, etc. But the better we know The Number, the more confidence we have in projecting the sustainability of retirement cash flow. The Number may fluctuate through the years and stages of retirement, as higher levels of activity in the early years transition to higher medical costs in the later years. This calls for periodic reviews to update the assessment and discuss the plan. With conservative assumptions and a firm grasp on spending needs, we can work with clients to answer the question with a higher degree of confidence.
Even if all the sub-categories and specific details of spending aren’t spelled out, simply knowing the total of how much is going out is helpful. While tedious and potentially unsettling, digging in and identifying The Number is an essential exercise in the wealth planning process. Knowing it can bring the peace-of-mind that comes with a well-designed plan. Without it, wealth planning becomes nothing more than an educated guess.