SALT for PE: Wayfair Comes to Town

WHAT DO YOU NEED TO KNOW?

Previously, businesses had to have a physical presence in a state in order to be required to collect and remit sales tax there. However, the 2018 U.S. Supreme Court ruling on South Dakota v. Wayfair (Wayfair) changed the existing decision by ruling that in-state, physical presence is not required for a state to subject a business to sales tax. With this, having a certain level of sales or transactions in a state creates sales tax obligations, and it also has implications for gross receipts taxes.

With regards to sales tax, there are two key determinants:

• Does the business have nexus in the state where the goods or services are sold or used?
  • Previously, this meant physical presence, now it refers to physical or economic presence.
• Are the goods or services in that state subject to sales tax?

Wayfair only changes the nexus standard (#1 above), and thus expands where businesses have nexus. Consequently, companies likely have more sales obligations in a greater number of states.

Though states are still responding to Wayfair and its full implications have yet to be seen, enough is known to react proactively. Wayfair has implications for all firms with interstate sales of goods or services to U.S. customers in states and/or localities that impose a sales tax. This includes:

Online Retailers;

Online Service Providers;

businesses relying on resale or other exemptions; and

non-U.S. businesses selling into the U.S.

Businesses already collecting and remitting sales tax on most or all of their sales will likely experience minimal impact. For the rest, Wayfair could create new filing obligations and the need for more or better sales tax compliance. To this point, it’s also important that Wayfair be addressed in buy-side due diligence, as well as for existing portfolio companies, to avoid costly issues during a holding period and on exit.

A&M is already assessing Wayfair and the economic nexus in the tax diligence process, especially for private equity deal-makers on the buyside. Normal contractual protections can be considered where exposures are identified, although any identified issues will likely be taken out from any Representation & Warranties (R&W) policy.

Voluntary Disclosure Agreement (VDA) rights should also be considered – these allow non-compliant companies to correct their historical sales tax issues on a voluntary basis, thus avoiding penalties and potentially limiting look-back periods. Without the right to complete VDAs or similar programs, a buyer may not be allowed to correct historical issues, causing the problem to grow until it is addressed.
A&M helps sponsors with existing portfolio companies:

• perform a high-level nexus and taxability analysis in states where the business has material sales (if real risks are identified, a more detailed review is undertaken);
• prepare for exit by reviewing sales tax, specifically Wayfair implications, before bidder due diligence starts; and
• consider a portfolio-wide Wayfair review if a portfolio or subset of businesses has material exposure to Wayfair and sales tax issues, and/or portfolio management is not prepared to address the issues.

Please reach out to A&M if you have any questions or if there’s anything we can assist with in terms of thinking through the risks and options. To learn more about our team, visit: https://www.alvarezandmarsal.com/expertise/tax