How does Wayfair affect your restaurant business?

Finance to Table Education for Operating Your Restaurant

For half a century, sales tax from interstate commerce abided by two U.S. Supreme Court rulings: National Bellas Hess v. Department of Revenue of Illinois and Quill v. North Dakota. In these cases, the Court concluded that an out-of-state seller must have physical presence in a state before sales tax collection laws could be imposed.

This all changed last year when our High Court overturned this precedent in South Dakota v. Wayfair. Pointing to the fact that society and technology has changed dramatically over the years, making it easier for interstate commerce and tax collection, the Court ruled that physical presence was no longer a requirement. This disrupted one of the most important interstate commerce laws that businesses relied upon.

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In the time since Wayfair was decided, states have been implementing new sales tax laws. Now that physical presence is not necessary, states are writing laws and regulations that require out-of-state sellers to collect and remit sales taxes if the company has “economic nexus.” These economic nexus laws mandate businesses to keep a close eye on their sales and transaction numbers in each state. Once a business reaches a state’s threshold in a prior or current year, they are required to register and file sales tax returns. In any case, businesses everywhere are facing new and burdensome requirements.

It is important to note that Wayfair applies to all companies (even restaurants!), and not just online retailers. Therefore, service companies and restaurant businesses that provide a service or catering, sell and ship food or sauces to other restaurants, grocery stores, or individuals, sell promotional items (t-shirts, mugs, etc.), or buy advertising in other states, are also implicated by new “Wayfair rules” and should review sales in each state to determine whether sales tax collection is now required.

In the Wayfair case, South Dakota required out-of-state sellers that make sales of tangible personal property to in-state customers to collect and remit sales tax if the out-of-state seller had $100,000 in sales revenue or 200 separate sales in South Dakota. The Supreme Court did not explicitly state that this should be the threshold, rather the Court held that the test should be one of reasonableness.T

This has allowed states to determine what they believe is “reasonable.” Many states have used the same threshold, knowing that it is reasonable due to the Court allowing it in Wayfair. Other states are making their own rules. Oklahoma, for example, only requires $10,000 of sales before a business must collect and remit sales tax. Some states have gone the other way, Texas for one, and set its threshold at $500,000. Additionally, some states have adopted a use tax notification requirement if sales are below the stated threshold for collection. In Washington, if a remote seller has sales exceeding $10,000, the company has a choice of either registering and collecting the sales tax or following certain use tax notice and reporting requirements.

The overwhelming majority of state thresholds reference “gross sales,” as opposed to “retail sales.” This means that businesses must include transactions not typically subject to sales tax (sales for resale or exempt transactions) in the threshold analysis. Therefore, restaurants that sell both wholesale and direct-to-consumer may find its direct to consumer sales subject to a state’s sales tax requirements even if the direct-to-consumer sales are under the threshold set by a state.

While at first states were lenient in giving businesses time to became compliant, they are becoming more pressing a year after the Wayfair decision. Restaurants should consider implementing a system to keep track of interstate sales. This should be in addition to keeping track of where employees live and travel upon behalf of the business. Note that advertising or participating in a trade show can also trigger nexus. Businesses will need to work through the state registration process, how to ensure sales tax is both collected and remitted at the proper rate, and if sales may be eligible for an exemption.

Consult with a tax advisor that has experience handling nexus issues both pre and post-Wayfair to make sure your business stays compliant. Henry+Horne has a plethora of experience with multi-state tax consulting, and we would love to help.

For any questions or concerns, please contact your Henry+Horne tax advisor.

Brian Ess