A&M Tax Advisor Weekly

SALT for PE

Adam Benson, Managing Director

abenson@alvarezandmarsal.com

Benjamin Diaz, Managing Director

bdiaz@alvarezandmarsal.com

Brian Pedersen, Managing Director

bpedersen@alvarezandmarsal.com

Louis Mancini, Senior Director

lmancini@alvarezandmarsal.com

Gina Pizzo, Managing Director

gpizzo@alvarezandmarsal.com

Laurie Wik, Senior Director

lwik@alvarezandmarsal.com

March 3, 2019 / North America

For many years, based on a prior U.S. Supreme Court decision, a business had to have physical presence (generally property or employees, permanent or transitory) in a state for such state to be able to require an out-of-state seller to collect and remit sales tax in that state. In 2018, the U.S. Supreme Court decision in South Dakota v. Wayfair (generally referred to simply as Wayfair) upended that long-standing theory and held that in-state, physical presence is no longer necessary for a state to subject a business to sales tax. Rather, merely having either a certain amount of sales or transactions in a state may create sales tax obligations.

The decision has implications for all companies, new or old, across all industries, which sell any nature of goods or services to U.S. customers across state lines. Moreover, Wayfair may also have implications beyond sales tax, such as for gross receipts taxes, which are imposed by some states and localities.

As sales taxes and gross receipts taxes are applied on gross sales, the cost of errors in compliance can be significant – and Wayfair only adds to that risk by expanding the number of jurisdictions in which a business may be taxable. As such, it’s important that Wayfair be addressed in buy-side DD, as well as for existing portfolio companies, to avoid costly issues during a holding period and on exit.

Here’s a quick summary of what Wayfair could mean for sponsors and their portfolio companies:

What does the Wayfair decision change about how sales taxes are levied?

There are generally two key determinations to be made with regard to sales tax:

  • Does the business have “nexus” in the state where the goods or services are sold or used (historically nexus was physical presence, now it’s physical and potentially economic presence in a state)? And;
  • Are the goods or services subject to sales tax in that state?

Wayfair only changes the nexus standard, so #1 above. The result of that change is likely an expansion of where many businesses have nexus, and thus potentially an expansion of sales obligations in more states.

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North America