Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 9 MIN READ

Dissolving cleanly in 2019: the Wayfair complication

The state cancellation is one filing. The sales-tax tail from the two years you were collecting without knowing it is the harder part

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. What the state-level filings still look like
  2. Why Wayfair changed the dissolution math
  3. Final returns: federal, state income, payroll, sales
  4. Foreign withdrawals and the nexus that is not sales-tax nexus
  5. The mistakes people make in 2019
  6. Rule of thumb
  7. Sources

issolving an entity in June 2019 is still three filings and a return, but the list of states in which those final returns are due is longer than it was twenty-nine months ago. That is the Wayfair tail, and it is the reason the clean dissolution we walked through in January 2017 needs a rewrite for anyone winding down a business this year.

The statute and the forms have not changed. The tax geography has.

What the state-level filings still look like

The home-state mechanics are the same ones we mapped before. For a Delaware LLC, 6 Del. C. § 18-203 requires a Certificate of Cancellation filed with the Division of Corporations "upon the dissolution and the completion of winding up." The fee is $200 under 6 Del. C. § 18-1105(a)(3), as amended. The LLC cannot obtain a certificate of good standing after cancellation. A Delaware corporation dissolves under 8 Del. C. § 275, must be current on franchise tax before the Division will accept the Certificate of Dissolution, and keeps accruing franchise tax until the dissolution is on the rolls. A resolution adopted in August 2018 that sat in a drawer through March 2019 means 2019 franchise tax is due.

For a California LLC, the short-form path under Form LLC-4/8 is still the loophole worth knowing. A California LLC organized on or after January 1, 2004 may file LLC-4/8 within twelve months of filing its Articles of Organization if it has conducted no business, has no debts other than LLC tax liabilities, has distributed any assets to those entitled to them, and the members unanimously consent. There is no filing fee. The payoff is that the LLC is not subject to the $800 annual franchise tax under Cal. R&TC § 17941 for its first tax year. Miss any of those boxes or the twelve-month window, and the LLC files the longer LLC-4/7 Certificate of Cancellation, a final Form 568 with the FTB, and the $800 minimum tax for the tax year of the final return. LLC-4/7 must be filed within twelve months of the final-return date, or the FTB continues to assess $800 annually until it is.

For a New York LLC, NY LLC Law § 705 still requires Articles of Dissolution filed with the Department of State, and § 703 still assigns authority to wind up to the members unless the operating agreement says otherwise. Distribution order under § 704 is creditors first, then members. The $60 filing fee and the absence of a republication requirement on dissolution are the same. The pattern in Texas, Florida, and the other anchor states has not moved either.

The filings themselves are not the 2019 story. The returns that feed into them are.

Why Wayfair changed the dissolution math

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (June 21, 2018) overruled the physical-presence rule of Quill and let states assert sales-tax collection duties on remote sellers who meet an economic-nexus threshold. The effect on an active e-commerce business was immediate and well covered. The effect on a dissolving business is less discussed and more expensive.

By mid-2019, more than thirty-five states had enacted economic-nexus thresholds, most of them patterned on South Dakota's $100,000 in sales or 200 transactions. Georgia's took effect January 1, 2019. New York's department of taxation issued guidance in January 2019 applying a $300,000-and-100-transaction threshold, later raised to $500,000, retroactive to June 21, 2018. California's AB 147 set a $500,000 threshold effective April 1, 2019, with a retroactive collection exposure for the post-Wayfair window that the FTB and CDTFA spent the spring clarifying. Texas's remote-seller rule, adopted by the Comptroller in late 2018, has a $500,000 threshold effective October 1, 2019.

The operational reality for a small online seller winding down in 2019 is this: between June 2018 and the dissolution date, the business very likely created collection obligations in one or more states it had never registered in, never collected for, and never filed a return in. Most states have said they will not assert retroactive liability for periods before their statutes took effect, consistent with South Dakota's own non-retroactivity provision cited approvingly in the Wayfair majority. Most states have not said they will forgive the return-filing obligation for periods after the effective date where the threshold was met and the seller failed to register.

The practical answer for a dissolving seller is to reconstruct, state by state, the sales history from late June 2018 through the dissolution date, identify every state in which the threshold was crossed, register (if only to deregister), file the returns, remit the tax, and close the account. Voluntary-disclosure agreements are available in most states and cap the lookback period and waive penalties in exchange for prospective compliance. For a business closing its doors, the VDA is the cheapest path to a clean close. For a business that never crossed the threshold in a given state, keep the sales records long enough to prove it on audit.

The old dissolution checklist assumed the sales-tax universe matched the set of states where the entity had physical presence. After Wayfair, those sets are different, and the second one is usually larger.

Final returns: federal, state income, payroll, sales

The federal side is unchanged in form. For a C-corp or S-corp, Form 966 is still mandatory under IRC § 6043(a) and 26 CFR § 1.6043-1. The form is filed within thirty days after the adoption of the resolution or plan to dissolve, with a certified copy of the resolution attached. The final Form 1120 or 1120-S has the "final return" box checked, final K-1s go to shareholders, and liquidating distributions are reported on Forms 1099-DIV when the proceeds are treated as ordinary dividends or on the shareholder's Schedule D when treated as exchange under IRC § 331. Corporate-level gain or loss on distributed property is recognized under IRC § 336. A partnership files a final Form 1065 with the "final return" box checked; a single-member LLC disregarded for tax purposes simply stops appearing on the owner's Schedule C or 1120. For a partnership, 2019 is also the first year under the Bipartisan Budget Act centralized partnership audit regime for most taxpayers, which changes how adjustments after dissolution would be handled if they arise: the partnership representative (or its successor in liquidation) remains the point of contact, and post-closing adjustments can be pushed out to the year-of-closure partners or borne at the partnership level depending on the election made on the final return. Get the election right on the way out.

The TCJA § 199A deduction is the final-year item most easily overlooked. Under the final regulations issued January 18, 2019 and published at 84 Fed. Reg. 2952, the qualified-business-income deduction is computed at the individual level from the items reported on the partnership's or S-corp's final K-1. A business that dissolves mid-2019 still generates QBI for the short period, and the owners can still claim up to the 20% deduction on the final K-1's flowed income. Two traps: (1) the W-2-wage and UBIA limitations apply at the entity level based on the short-period figures, which are easy to mis-annualize; (2) losses in the final year create negative QBI that carries over to the owner's next year under Treas. Reg. § 1.199A-1(d)(2)(iii). The TCJA sunset is scheduled for tax years beginning after December 31, 2025 under § 199A(i), so a 2019 final year is firmly inside the window and worth computing carefully.

Payroll-tax finality is procedural but unforgiving. File the final Form 941 with the "final return" box checked, file Form 940 for the year, issue W-2s and W-3, and, if the entity had contract labor, issue 1099-NECs (reported on Form 1099-MISC box 7 for 2019). Close the state unemployment and withholding accounts with written notice. An open state UI account will generate quarterly zero-return obligations and, eventually, an estimated-assessment notice that compounds.

Sales-tax finality is where the Wayfair tail lives. Every state where the entity registered (whether pre-Wayfair by physical presence or post-Wayfair by economic nexus) needs a final return filed and the account formally closed. In most states, the sales-tax registration does not self-terminate when the entity's secretary-of- state registration terminates. The two systems do not talk to each other. An administratively dissolved LLC can accrue sales-tax minimum filings and penalties for years after the cancellation.

Foreign withdrawals and the nexus that is not sales-tax nexus

The 2017 advice on Certificates of Withdrawal in every foreign-qualified state still holds. A 2019 addition: a sales-tax registration triggered by Wayfair does not, by itself, require foreign qualification with the secretary of state. The two obligations are distinct. A business with $120,000 in sales to Illinois customers in 2018 and no other contact with Illinois probably incurred a Wayfair-era sales-tax collection duty under the Retailers' Occupation Tax Act as amended, but probably did not incur a duty to foreign-qualify under the Illinois Business Corporation Act because "transacting business" for qualification purposes continues to exclude isolated interstate sales. Foreign qualification is a separate inquiry from sales-tax nexus, and most dissolutions will not have foreign-qualification cleanup in the same states where they have sales-tax cleanup.

Income-tax nexus is the third strand. Public Law 86-272 still protects solicitation of orders for tangible personal property from state income-tax assertion where the only in-state activity is solicitation. It does not protect digital-services or SaaS revenue, and a growing number of states have asserted income-tax nexus on factor-presence grounds analogous to Wayfair. A dissolving business with non-trivial revenue from digital services into several states should audit its state income-tax filings for the same look-back window as the sales-tax review, and file any missing final returns before cancellation. States will not chase a dissolved LLC forever, but they will chase it for years, and a closed registration is a much harder target than an open one.

The mistakes people make in 2019

The 2017 list still applies: not foreign-withdrawing, missing the California short-form window, skipping Form 966, and distributing before creditors are paid. 2019 adds three.

First, treating the dissolution as the event that ends sales-tax obligations. It does not. Registration status ends obligations. Cancellation of the entity does not close a sales-tax account. Close the account with each state's department of revenue in writing and keep the confirmation.

Second, ignoring the post-Wayfair states the business never registered in. A VDA submitted pre-dissolution costs a few hundred dollars per state in professional fees plus the tax actually due; an audit-driven assessment post-dissolution can attach to the members personally under successor-liability theories in several states.

Third, assuming § 199A does not apply because "we're closing." The deduction is computed at the owner level on the final K-1's flowed income. Do the calculation.

Rule of thumb

In 2019, a clean dissolution is still four state filings plus Form 966 plus final returns, but the final-returns set now includes every state where Wayfair-era economic nexus crossed the threshold after June 21, 2018. Reconstruct the sales history, file the back returns or the VDAs, close the sales-tax accounts, then cancel the entity. Do it in that order and the franchise-tax meter stops running in the places you remembered and the sales-tax meter stops running in the places you did not.

Sources

Keep reading

More from the journal.