Sales Tax Pulls Even with VAT: The Wayfair Case
On June 21, 2018, in a highly anticipated decision, the US Supreme Court ruled (essentially) that companies do not have to have a physical presence in a state in order to be required to register for and collect sales taxes. This decision may have far reaching implications on remote and online sellers.
The sales tax regime in the United States is infamous for its complexity. Each state and many municipalities have their own rates and sets of rules. Companies selling into multiple states found it very difficult to understand their obligations and equally difficult to comply. For years, these rules were based on a standard of physical presence. Essentially, companies had an obligation to collect and remit sales taxes when they had a physical presence in a state. This standard offered remote and online sellers an advantage since their goods and services could be sold into states where they had no physical presence free of sales taxes. This was particularly advantageous for Europeans who were able to avoid both VAT and sales tax (in the US).
The State of South Dakota passed legislation last year that required sellers selling tangible personal property, products transferred electronically, or services for delivery into the state, who do not have a physical presence in the state, to remit sales tax. This legislation was challenged (Wayfair v South Dakota) with the case ultimately reaching the US Supreme Court.
The Wayfair Case
In a slim 5 – 4 decision, the court backed the State of South Dakota, thereby opening the door for more states to follow suit with similar legislation. It should be noted however that, in reaching its decision, the court considered it important that South Dakota’s rules required a significant amount of activity (in this case US$100,000 in sales and/or 200 transactions), thereby implying that de minimis activity might still be exempted.
The court also looked favorably on the South Dakota law because of its simplicity of rules and regulations and ability for taxpayers to comply; it did not result in an undue burden to interstate commerce.
There are currently 31 states that have laws on their books taxing internet sales. This case will probably result in those states modifying their rules to conform with those of South Dakota and other states adopting similar laws.
Remote and online sellers will want to review their controls and procedures to prepare to comply with this trend. Foreign inbound sellers may need to consider adjusting their strategy of avoiding a physical presence in the US just to avoid taxes. The Wayfair case, in conjunction with tax reform, presents a unique opportunity for businesses to review their inbound US strategy. Moore Stephens Doeren Mayhew can assist you with this analysis.
Doug Martin, CPA
Doug Martin has significant experience assisting expatriate and inpatriate individuals to help minimize overall global tax exposure. He helps clients with foreign assignment planning services, including completion of US income tax returns, review of tax equalization and assignment policies, and payroll compliance. Doug also consults with clients on structuring of international business operations and assists with U.S. tax compliance required to report foreign operations and related-party transactions. Contact Doug at 248.244.3777 or firstname.lastname@example.org.