Government Contracting Sales and Wayfair

HOST: Hi, welcome to Cherry Bekaert's GovCon podcast, where we discuss current topics of interest to government contractors. My name is Susan Moser. I'm a partner in the firm's Government Contract Industry Group.

HOST: With me today is my partner, Cathie Stanton. Cathie leads our firm's state and local tax practice. We're going to be talking about the U.S. Supreme Court's recent Wayfair decision. Cathie, why don't you start by giving us a brief description of what this case is about?

CATHIE STANTON: The Wayfair case looked at sales tax collection and whether a vendor must have a physical presence in a state for that state to require sales tax collection. Wayfair is a large internet retailer. The case was not limited to Wayfair; it involved Wayfair, Overstock, and Newegg.

CATHIE STANTON: The state of South Dakota enacted legislation requiring these vendors to collect sales tax even without a physical presence in the state. The U.S. Supreme Court sided with the states and indicated that, in today's environment of internet commerce, physical presence is not required for states to require vendors to collect sales tax.

HOST: How does this case specifically impact government contractors?

CATHIE STANTON: First, there is no change for sales to the U.S. government, and most state government sales remain exempt. That does not change the taxability of sales for government contractors.

CATHIE STANTON: However, more vendors will charge sales tax on purchases, and some of those sales may not be subject to tax. Accounts payable should ensure they are not overpaying sales tax and should provide exemption certificates to vendors.

CATHIE STANTON: On the sales side, if you are a subcontractor selling to a prime contractor, it is important to obtain resale exemption certificates from prime contractors regardless of physical presence. Physical presence no longer affects a state's ability to tax.

CATHIE STANTON: While this case involved sales tax, states have long eliminated physical presence requirements for income tax. Certain states, such as New Mexico and Hawaii, impose taxes on government contractors through an excise tax or a gross receipts tax.

CATHIE STANTON: If you relied on not paying tax because you did not have a physical presence, you need to reconsider. Performing services that benefit recipients in New Mexico, Hawaii, or shipping products with services performed can create tax liability even if you never set foot in that state. Commercial contracts will also be impacted.

HOST: We often get involved when companies are bidding on a contract. It is important to consider potential sales tax issues before submitting the contract rather than after. Cathie, in conclusion, what actions should government contractors take in light of Wayfair?

CATHIE STANTON: Review all sales and use tax policies and procedures. Common errors include assuming exemptions flow through for real estate construction, which they do not always for government contractors, and misclassifying contracts as service or procurement.

CATHIE STANTON: If it's a service contract, exemptions often are not available and the government contractor is deemed the end user. Also, if a contractor depends on a physical presence standard of nexus for any state taxation, they need to rethink that because physical presence is no longer required.

CATHIE STANTON: Any contractor receiving benefits outside its state, even without physical presence, should evaluate whether it has obligations in that state.

HOST: Now more than ever, let the buyer and the seller beware.

CATHIE STANTON: That's right.