By Michael Rapoport
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 14, 2018).
Wells Fargo & Co. said Friday it was hit in the second quarter with a $481 million tax expense related to a legal decision.
What was behind that? Turns out it was the recent U.S. Supreme Court ruling affecting online retailers, which is also reaching out to hit non-retailers as well.
The case, which involved South Dakota and retailer Wayfair Inc., doesn't seem at first blush as if it would affect a bank like Wells Fargo, or extend beyond sales taxes. The court ruled in June that states could require online retailers to collect sales taxes even if they didn't have a physical presence within the state.
But some observers have suggested the decision might change the landscape on state income taxes as well, and that businesses might have to reconsider whether they're now liable for state income taxes in states where they do business but don't have physical operations.
The Wayfair ruling "creates additional risk for companies in the income tax arena," said Stephen Kranz, a tax attorney at McDermott Will & Emery in Washington.
The ruling may embolden states to pursue businesses for income taxes in the same way they can now require collection of sales taxes. "I think states are more likely to take an aggressive approach on income taxes now that they have the Wayfair decision," said David Pope, an attorney at Baker & McKenzie LLP in New York.
Wells Fargo said the $481 million expense was due to adjustment of its state income tax reserves following the Wayfair ruling. Because of the ruling, some Wells affiliated entities may be considered to be subject to state income taxes even if they aren't physically present in a given state, John Shrewsberry, Wells' chief financial officer, said on the bank's earnings conference call.
In addition to the sales-tax impact, the decision "has an income tax implication as well," Mr. Shrewsberry said.
The $481 million expense from the ruling equates to 10 cents a share, contributing to Wells missing analysts' earnings estimates for the quarter. Wells had second-quarter earnings of 98 cents a share, down from $1.08 a share in the year-ago quarter and falling short of the $1.12 estimate of analysts polled by Thomson Reuters. Wells would still have missed estimates without the tax expense from the ruling, however.
Both businesses and states are still feeling their way in addressing the implications of the Wayfair ruling, and there is likely to be plenty of uncertainty and questions to be resolved going forward. "I think the states are digesting this just as much as taxpayers are," Mr. Pope said.
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