The aftermath of Wayfair: Developments and action steps for businesses

The aftermath of Wayfair: Developments and action steps for businesses Wednesday, September 5, 2018 1-2:30 pm ET We will be starting soon Please disable pop-up blocking software before viewing this webcast

Speakers Mark Arrigo National Managing Partner SALT Jamie Yesnowitz Principal SALT WNTO Leader Kevin Herzberg Partner SALT Matthew Melinson Partner SALT Sherry Lam Director SALT Adam Raschke Senior Manager SALT Metisse Lutz Senior Manager SALT 2018 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 2

Agenda 1 Introduction 2 State Developments Since Wayfair 3 Engaging Team, Processes and Technology Through Technical Tools 4 Financial Accounting Impact 5 Other Potential Implications / Questions Grant Thornton LLP. All rights reserved. 4

Introduction Common issues identified / introduced in our last webcast: Economic nexus thresholds what are the relevant measures? For example, do you look at gross sales into a state, or just taxable sales? What about sales for resale? Does physical presence still matter in light of Wayfair? How long will it take the states to implement the rules endorsed in Wayfair? What about localities? How does Wayfair affect corporation income tax nexus? Does Wayfair affect foreign sellers? Will Congress weigh in on the debate? Grant Thornton LLP. All rights reserved. 6

Introduction What we will accomplish today: To the extent possible, identify the trends that we've seen with respect to states addressing Wayfair, through legislation and other guidance Show how technical tools are going to provide a window into the analysis that should be undertaken to ensure you are Wayfair ready Consider the less intuitive effects of Wayfair, including income tax impact Grant Thornton LLP. All rights reserved. 7

State developments since Wayfair State action to date Varied responses Legislation Directives Administrative guidance Varied definitions Taxable v. gross receipts Wholesale/exempt sales Varied breadth Sellers/dealers Marketplace facilitators Grant Thornton LLP. All rights reserved. 9

State developments since Wayfair State action to date New Jersey One of the first states to pass legislation post-wayfair, but yet to be signed by Governor Hawaii Originally issued retroactive date but took it back through an extensive directive California Proposed legislation No transaction threshold, increased dollar threshold Grant Thornton LLP. All rights reserved. 10

State developments since Wayfair State action to date Generally similar dollar/transaction threshold Following the Court's decision, the majority of states have enacted legislation or issued guidance following SD's $100,000/200+ transaction thresholds Some oddball states A few states have issued higher dollar thresholds, but same 200+ transaction threshold (AL, CT, GA, MA) WA timing determination Dollar threshold only A handful of states are only looking at dollar thresholds (CA, MS, OH, PA, SC, TN) Grant Thornton LLP. All rights reserved. 11

Engaging team, processes and technology through technical tools On our last webcast, we reviewed practical considerations that we expected would be important action steps as states began to address Wayfair Reviewing company-wide activities Calculating financial statement impact Determining automation needs Considering additional registration and compliance obligations and audit / VDA / amnesty implications We also noted the opportunity to implement innovative changes to modernize your tax department through RPA, data analytics and blockchain solutions Grant Thornton LLP. All rights reserved. 13

Engaging team, processes and technology through technical tools Now that we are a couple months in on the states' response to Wayfair, we have a better sense as to what to expect in these areas, and begin to develop the technical tools necessary for companies to respond to these challenges It's helpful to consider what areas will need to be examined in order to determine whether your company is ready to handle sales taxes post-wayfair Grant Thornton LLP. All rights reserved. 14

Engaging team, processes and technology through technical tools Asking the key questions: Does this even apply to your business? What are your primary issues or concerns resulting from the impact of Wayfair on your business, customers and competitors? What is your current process to address changing state standards, assess risk, and identify potential opportunities? How are you engaging your current team, processes and technology to address the risks that have been identified? How does Wayfair impact the future state of your business, customers and competitors? How does Wayfair impact other state taxes, including state income and franchise taxes? Grant Thornton LLP. All rights reserved. 15

Engaging team, processes and technology through technical tools Where do you start? Determination of nexus and filing requirements Determination of business impact Determination of taxability of items and services Sales tax system selection and implementation Sales and use tax compliance and registration Managing documentation Grant Thornton LLP. All rights reserved. 16

Using technology & existing data to assess risk and compliance requirements Organizations are dealing with rapid administrative and legislative change and are trying to determine what the impact on their business will be. Many times they are doing so with limited resources and a lot of internal stakeholders. Ways technology can help deliver on a timely need: Limited Data Need may be in multiple formats or come from many sources, but for an initial review only high-level data is needed Time to Delivery with the appropriate inputs, usable information can be produced quickly Usability resulting analysis is user friendly for all members of an organization, from high-level reporting to underlying data availability 2018 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 17

Financial accounting impact ASC 450-20, Accounting for Loss Contingencies Sales/use taxes are not based on income and are accounted for as part of pre-tax income ASC 450 accounts for loss contingencies, including sales/use taxes ASC 740-10, Accounting for Uncertain Tax Positions Public business entities need to consider potential implications in their current quarter, the 2 nd calendar year quarter ended June 30 th, 2018. SAB 118 is NOT applicable Grant Thornton LLP. All rights reserved. 25

Financial accounting impact ASC 450-20, Accounting for Loss Contingencies ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence: Probable The future event is likely to occur Reasonably possible The chance of the future event occurring is more than remote but less than likely Remote The chance of the future event occurring is slight Grant Thornton LLP. All rights reserved. 26

Financial accounting impact ASC 450-20, Accounting for Loss Contingencies Recognition of liability is required when it is probable that the entity has incurred a loss and the entity can reasonably estimate the amount of the loss Financial statement disclosures may be required if likelihood that a loss has been incurred is not probable, but instead is either reasonably possible or remote Disclosure must include: The nature of the contingency, and An estimate of the possible range of loss or a statement that such an estimate cannot be made Grant Thornton LLP. All rights reserved. 27

Financial accounting impact ASC 450-20, Accounting for Loss Contingencies Potential re-evaluation of process importance in light of the complexities related to initially applying new economic nexus standard to more states and increased volume of transactions: Sales tax billing, collection, remittance, and documentation support; Implementation of changes to systems to apply these rules Grant Thornton LLP. All rights reserved. 28

Financial accounting impact ASC 740-10, Accounting for Uncertain Tax Positions Since many states have had economic nexus standards for several years, it is possible that the impacts of any non-filing liabilities may be imposed retroactively When considering uncertainties related to nexus, there is no statute of limitations on non-filing positions The recent Wells Fargo second quarter earnings announcement stated that the company has provided for a $481 million discrete item under ASC 740-10 related primarily to state income tax nexus exposures resulting from the Wayfair decision Grant Thornton LLP. All rights reserved. 29

Financial accounting impact ASC 740-10, Accounting for Uncertain Tax Positions Subsequent measurement of a tax position meeting the recognition requirements shall be based on management's best judgment given the facts, circumstances, and information available at the reporting date ASC 740-10-35-2 Subsequent changes in judgment that lead to changes in measurement shall result from evaluation of new information and not from a new evaluation of information that was available in a previous financial reporting period Grant Thornton LLP. All rights reserved. 30

Other potential implications / questions Income Tax Nexus and throwback In our last webcast, we noted that the application of the physical presence test to income tax no longer appeared possible, resulting in scrutiny of these types of positions We've focused on the potential additional tax exposure that may result in a state and local tax environment in which substantially all the states broadly impose economic nexus standards But there may be instances in which having a very broad economic nexus standard might reduce existing income tax liability the application of throwback rules Grant Thornton LLP. All rights reserved. 32

Other potential implications / questions Income Tax Nexus and throwback Throwback If a corporate taxpayer is making sales of tangible personal property to a customer in another state, and the taxpayer is not subject to the destination state's corporate income tax (for example, due to the application of P.L. 86-272), under a throwback rule implemented by approximately 20 states, the sale is not sourced to the destination state Instead, the sale is sourced back to where it originated (i.e. the taxpayer's own state), inflating the taxpayer's sales factor in the state that is using throwback, and by extension, overall apportionment factor Therefore, it is vitally important to determine whether a taxpayer is subject to tax in another state if so, then the throwback rule doesn't apply Grant Thornton LLP. All rights reserved. 33

Other potential implications / questions Income Tax Nexus and throwback Definition of "subject to tax" differs between the states that impose throwback The definition may be based on the law of the destination state, the taxpayer (origin) state, or on constitutional / federal standards there's very little consistency in which law to use, and the states themselves are not always clear on how to apply the definition In light of Wayfair, if the states are explicitly allowed to subject companies that do not have physical presence to corporate income taxes, by extension, more companies are going to be subject to taxes in more jurisdictions, resulting in less instances in which the throwback rule is applicable Expect states with throwback rules to clarify their guidance as to what taxpayers are "subject to tax" Grant Thornton LLP. All rights reserved. 34

Other potential implications / questions Foreign sellers While treaty protection on foreign sellers is often granted with respect to the federal income tax, the same protection generally does not apply with respect to state taxes After Wayfair, foreign sellers may find themselves with the same nexus issues as U.S. remote sellers Monitoring sales and transactions into individual states is necessary Foreign sellers will now have to put measures in place to monitor U.S. activity on a dollar and transaction basis Need for automation and compliance tools Similar to U.S. sellers, foreign sellers will need to implement compliance processes to distinguish which sales are taxable versus which are not, and to properly collect and remit the tax from taxable sales. Grant Thornton LLP. All rights reserved. 35

Other potential implications / questions Foreign sellers The manner in which foreign sellers conduct business in the U.S. may change Many foreign sellers use agents or representatives and may have gotten away with tracking travel/nexus creating activities Foreign sellers doing business in the U.S., either directly or indirectly through agents, should monitor traveling activity throughout the U.S., in addition to their dollar and transaction threshold data. Can states truly enforce compliance from foreign sellers? Grant Thornton LLP. All rights reserved. 36

Other potential implications / questions Foreign sellers Remediation efforts Foreign sellers may want to review past activities and look to remediate liabilities incurred through traditional physical presence nexus Voluntary disclosure/amnesty benefits (i) compliance with a jurisdiction; (ii) a limited period for open exposure periods (VDA); and (iii) waiver of penalties that can be quite high (in excess of 20 percent in some jurisdictions); waiver of interest in limited cases. Compliance Proper registration and collection in jurisdictions Grant Thornton LLP. All rights reserved. 37

Other potential implications / questions Foreign sellers Income tax implications Wayfair implicitly affirms the states ability to use economic nexus standards for income tax purposes, resulting in the potential for states to come after noncompliant businesses and assessing tax on a retroactive basis Foreign sellers must be prepared to examine potential tax exposure to the extent that they have relied on the physical presence test to avoid paying income taxes Going forward, it is likely states will implement quantitative (factor presence) economic nexus standards for income tax purposes. P.L. 86-272 may preempt economic nexus rules endorsed by Wayfair for income tax purposes Grant Thornton LLP. All rights reserved. 38

Other potential implications / questions Application to marketplace providers / facilitators There is an open question as to whether the Wayfair economic nexus provisions can be applied to marketplace providers / facilitators (i.e., operators of "online malls" that facilitate transactions between buyers and sellers) The South Dakota law at issue in Wayfair did not impose collection and remittance responsibilities on marketplace providers / facilitators However, states may extend the Wayfair analysis to these entities, which may lead to significant logistical issues Marketplace providers / facilitators may become arbiters of whether a particular transaction between an unrelated buyer and seller is taxable or not, and this could lead to collection errors Grant Thornton LLP. All rights reserved. 39

Other potential implications / questions Potential Congressional action Will Congress ever act, and if so, when? Does it depend upon which political party has control over the House / Senate following the midterm elections? Can this become part of Tax Cut 2.0? Does Congress wait until states have had an opportunity to react to Wayfair? House Judiciary Committee hearing on July 24 Based on recent Murphy decision by the Court (endorsing state efforts on sports gambling), will Congress be less likely to act on state tax matters? Is 86-272 still valid? Is a Congressional law on sales tax regulation valid? Grant Thornton LLP. All rights reserved. 40

Other potential implications / questions What's next? As we noted on our last webcast, we expected a lot of sales tax nexus legislation and guidance, and we got it there's more to come over the next 6-9 months More immediately, watch South Dakota they could go the legislative route or the parties could settle, or a combination of the two Not much so far on the localities will localities that impose their own locallevel taxes can go lower with economic nexus thresholds? Notice and reporting requirements aren't dead yet look to see how states use these to reach businesses that do not meet economic nexus thresholds More litigation in the offing if states go too far States may broadly move to apply the thresholds to marketplace providers Grant Thornton LLP. All rights reserved. 41

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