Following a recent U.S. Supreme Court decision, non-U.S. companies and their subsidiaries selling goods or services in the U.S. need to evaluate whether their state sales tax responsibilities have changed.
In a recent high-profile case, South Dakota v. Wayfair1, the U.S. Supreme court overturned the requirement, from its 1992 ruling in another case, Quill Corp. v. North Dakota. This had stated that companies selling in the U.S. must have a physical presence in a state before they can be required to collect sales tax there.
Because of Quill, many non-U.S. companies selling into the U.S. had not been subject to a U.S. state sales tax collection obligation. Now, due to Wayfair and the sales tax economic nexus requirements that many U.S. states have implemented in response, many non-U.S. remote sellers may now be required to collect and remit sales tax in U.S. states even if they have no physical presence.
The impetus for the Wayfair decision was a South Dakota law that asserted sales tax nexus over any seller with either more than USD100,000 of in-state sales annually, or at least 200 transactions to instate purchasers annually – even if the seller had no physical presence there (a so-called “remote seller”).
As of 1 September 2018, about half of the U.S. states have a similar nexus law in place. These laws have varying enforcement dates, but many began on 1 October 2018.
What should non-U.S. businesses do now?
In the past, foreign companies selling into the U.S. without any physical presence in the U.S. did not have a reason to understand or implement sales tax collection regimes. But in light of this change it is now important to evaluate their U.S. business.
There are many factors to consider, such as whether the business exceeds a particular state’s sales tax economic nexus threshold, whether the product or service being sold is taxable in the given state, and whether an exemption applies.
It may also be questionable as to whether a U.S. state would have the ability to legally enforce a sales tax assessment against a business with no assets physically located in the U.S. But this issue has not been tested by the courts yet as these requirements are new.
All remote sellers with significant sales to U.S. purchasers should consider a ‘Wayfair check-up’ by a CPA firm. This would include a comprehensive analysis of the issues noted above, as well as the company’s overall nexus profile and the practical aspects of collecting and remitting sales tax, such as collecting exemption documents, systems considerations and overall process review.
1 South Dakota v Wayfair Inc. et al., Certiorari to the Supreme Court of South Dakota, decided 21 June 2018, https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf.
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