On June 21, 2018, The Supreme Court of the United States issued a ruling in the South Dakota v Wayfair Inc. case that states may charge sales tax on purchases from out of state sellers, even if the seller has no nexus (physical presence) in that taxing state.
This decision overturned the 25-year-old decision made in the Quill Corp. v. North Dakota case.
Since 1992, the sales tax regime followed by the majority of states in the US was the standard decided upon in Quill Corporation v. North Dakota, where the state of North Dakota attempted to require the collection of sales taxes on the Quill Corporation, an out-of-state office supply retailer that had no physical presence in the state but sold to customers in North Dakota using catalogues and phone sales. The Supreme Court's decision, based on the Commerce Clause, stated that states could not impose the collection of sales tax on retailers if there was no nexus in the state. Nexus has been defined not only by the existence of an office or warehouse, but also by the existence of employees or some other physical connection.
Under the Wayfair decision, even though Wayfair argued that the complexities of having to comply with each state's tax codes would place an enormous burden on retailers, the court held that the physical presence rule gave an unfair advantage to online resellers due to the present reality of e-commerce. This resulted in the loss of billions of dollars in tax revenues for the states to where product was being shipped, if the retailer had no nexus in the state. Therefore, the states could assert nexus existed even if a seller had no physical presence in a state, requiring sellers to collect and remit sales tax. While the decision was in favour of South Dakota, this sets a precedent for other states to follow South Dakota's lead and create economic nexus rules.
The challenge for non-US companies
The effects of this decision will have consequences not only for online retailers from both inside and outside of the country but also to anyone who shops online.
This decision and the resulting sales tax laws in each state will place a large burden on business that retail certain tangible goods and certain services in the US. The major impact will be on those large resellers. For example, in South Dakota, the economic nexus rules state that over the course of the year, a remote seller would have to have $100,000 in sales of tangible property, electronically transferred products or services or 200 separate transactions.
Currently, 45 states, plus the District of Columbia, impose a sales tax, out of which 25 states have adopted these economic nexus rules similar to South Dakota.
Every state has different laws governing the items subject to taxation, the sales tax rate, which can vary by county and even zip code, and the thresholds for filing sales tax returns, which can be annually, quarterly or monthly.
In order to collect sales tax in individual states, the businesses must register with the Department of Taxation as a foreign (not a resident) reseller in the states in which they are selling, based on the thresholds above (which vary by state). In some cases, the states also require the seller to register with the Secretary of State to qualify to do business in that state.
Not only must businesses determine the appropriate rate of sales to charge - which can either be based on the location to where goods are shipped or the location from where goods are shipped – but they must process the returns and remit the resulting taxes, each state having a separate website and method of preparing the sales tax return.
This is a very different process than most countries around the world, with much room for error.
Having a local partner in the US that understands the changing sales tax regime is imperative.
Amnesties and Penalties
It is unknown what the exact penalties and interest will be levied for non-compliance or incorrect collection of taxes, but each jurisdiction will have their own set of rules. States may waive these penalties under an amnesty program since they want companies doing business there to be compliant so that they can collect revenue due to them.
TMF Group US professionals are closely monitoring any developments throughout the United States and have the local knowledge and the tools to help your business in this changing regulatory environment.
To find out more, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.