US Supreme Court alters tax landscape for foreign retailers doing business in the USA
In a decision of significance to foreign retailers doing business in the US, the US Supreme Court issued a ruling in South Dakota v Wayfair Inc. (June 21, 2018) which determined that a US state 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.
Background
Under Quill, a state could not compel an out-of-state seller to collect sales and use taxes on sales to in-state consumers unless the seller had a physical presence in the state. This meant non-US businesses without a physical presence in the US could avoid state sales taxation (imposed in 45 states and the District of Columbia).
With the proliferation of internet based sellers since Quill, local brick and mortar retailers have long complained of the competitive disadvantage caused by this position and states have become wise to the billions of dollars lost in potential tax revenue.
In a nod to these sentiments, the Court in Wayfair ruled that the physical presence rule no longer was the prerequisite for the states to be able to impose the sales tax collection obligation on out-of-state sellers. States are therefore free to enact legislation requiring remote sellers to collect and remit their sales taxes. It was determined that states could satisfy the "substantial nexus" standard under the Commerce Clause of the US Constitution, by a remote seller having an "economic nexus" with the taxing state. In the case of South Dakota, the economic nexus is established if a remote seller delivers more than US $100,000 of goods or services into the state or engages in 200 or more separate transactions for the delivery of goods or services into the state on an annual basis.
Importantly, the Court did not provide a uniform threshold for the economic nexus. This has the potential to create much confusion on the parts of states and sellers alike. It is worth noting 25 states have adopted economic nexus rules similar to South Dakota (with presumably more to follow). On the other hand, states that attempt to impose nexus provisions that fall short of those sanctioned in Wayfair may find themselves subject to taxpayer challenge.
What does this mean for foreign retailers doing business in the US?
Potentially a big tax compliance headache.
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, a non-US business must register with the Department of Taxation as a foreign reseller in the states in which it is selling, based on the thresholds above (which vary state to state). Some states also require the seller to register with the Secretary of State to do business in that state. There is no central process either, each state has its own forms and procedures. Then factor in that businesses must determine the appropriate rate of sales tax to charge (typically around 5% to 10%), and it all amounts to a large and complex compliance undertaking.
Some businesses will also need to think about state and federal income taxes and withholding taxes too, which are independent of the sales tax obligation.
Practical Considerations
It will likely be years before states, collectively and individually, develop the rules needed to effectively implement the newly accessible economic nexus. Until then, there will be much uncertainty for non-US brands doing business in the US.
There are a few basic things a foreign retailer with US customers should be doing now:
1. Tracking how many customers they have in each US state, and the value of sales to each state.
2. Protecting themselves to some extent by contractually obliging US customers to pay the state use tax instead.
3. Reviewing and confirming that existing business practices do not raise US sales and use tax compliance issues moving forward. This will involve close consultation with accounting and legal professionals who can tailor their compliance advice to the specifics of that business's US sales activities.
If you would like to know more about this topic, please contact Gordon Drakes (Gordon.drakes@fieldfisher.com) or your usual contact in Fieldfisher's Retail and Consumer Team.
Co-authored by Dominic Tyler, and with thanks to our friends at Venable LLP for bringing this to our attention.