Sales tax – impact of the Wayfair case
In the past months you may have heard about the case of South Dakota v. Wayfair Inc., ruled on June 21, 2018 by the Supreme Court (hereafter referred to as “the Wayfair case”). The ruling generally allows US states to collect “sales tax” on sales made in their state, whether or not the seller has a physical presence in that state.
This decision has a major impact reaching far beyond e-commerce. It reverses a well-established case-law dating back to 1967, and confirmed in 1992, in which states could only require a business to collect and remit sales tax if they had a physical presence (employee, property, …) within the state.
The previous case-law, which was established well before the emergence of e-commerce, gave online merchants a significant competitive advantage by allowing them to sell in states without collecting sales tax when they didn’t have physical presence in those states.
When sales tax has not been collected by the seller on taxable goods or services, the customer is required to self-remit use tax to the state. Many states experienced difficulties enforcing this obligation, leading to an overall loss of state revenue on an annual basis in the order of $40 billion.
2.Implications for foreign companies
First of all, one must remember that US states are not bound by double taxation agreements in place at the federal level. State legislation resulting from this decision will therefore very likely apply to foreign companies who sell in US states without having a physical presence therein.
The scope of “sales tax” legislation may be limited.
Contrary to VAT, “sales tax” only applies to sales to end consumers, and therefore does not affect sales to distributors intended for resale (a resale certificate should however be provided by the distributor). Furthermore, as a general rule, “sales tax” does not apply to most services. That said, one should still verify the specific state legislation as there are more and more exceptions.
Like income tax nexus criteria, states may adhere to an economic sales tax nexus standard requiring remote sellers with no physical location in the state to collect and remit sales tax only if they exceed a certain threshold (minimum standard).
For example, the legislation in South Dakota which was subject to the Supreme Court decision has established that remote sellers with no physical location in South Dakota will not be required to collect and remit sales tax if in-state sales are less than $100,000 or include less than 200 transactions.
4.Which points should be taken into consideration and where does your business stand?
Certain aspects of this new economic nexus legislation are still unclear and additional guidance may be published by the state tax authorities. States may give for example a different interpretation on what is considered “a transaction” or when you should reassess whether your business exceeds the thresholds.
It is, however, important to be prepared and be able to identify if there is a potential increase in sales tax exposure/compliance obligations for your business. The following considerations can be useful in this respect:
Are you able to track both your physical (employee, property, …) as well as your economic presence (sales, number of transactions, …) per state?
Do you know if your products and/or services are taxable in the states where your customers are located? For example, not all states apply sales tax on software-as-a-service.
Do you know whether your clients are distributors or end consumers? You may consider to systematically request whether your customer can provide a resale or other exemption certificate.
With respect to online sellers: is your e-commerce platform able to automatically calculate sales tax and are the settings still up-to-date?
Is your business prepared to respond to customers if you will be charging sales tax where this was previously not required?
Below is an overview of the states that currently have economic sales tax nexus standards (updated on April 26th, 2019):
* Update on effective/enforcement date still to be provided or legislation still needs to be adopted.
** Sellers can elect to either collect and remit sales tax or comply with notice and reporting requirements.
*** Legislation effective as of January 1, 2019 but enforcement as of October 1, 2019.
International Management Solutions, Inc. (IMS) is an accounting, tax and consulting firm dedicated to assisting European companies with setting up their businesses in the USA. IMS has offices in Chicago, Detroit, New York, Tucson, Bordeaux and Brussels. IMS has two sister companies: IAS and EXTS. International Attest Solutions, LLC (IAS) is an independent audit firm (CPA) focused on attest services and Exelmans Transaction Services, LLC (EXTS) is a consulting firm dedicated to assisting European companies setting up operations in the United States through acquisitions. IMS, IAS and EXTS work in close cooperation to service the needs of clients.
This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.