A US Supreme Court ruling last year is expected to impact every company that sells goods or services into the US within months, or even weeks and days. In many places, it has already begun.
The ruling, South Dakota v. Wayfair, is considered precedent-setting because of its finding that US states may charge tax on purchases made to individuals and businesses within their borders by out-of-state sellers, even if these sellers don’t have a physical presence in the state.
Until the Supreme Court’s decision, states had the authority to impose a sales tax collection obligation only on businesses that were physically present within their borders.
The “Wayfair decision” is seen as affecting e-commerce companies in particular, as many of these businesses have enjoyed a significant competitive advantage over their bricks-and-mortar retail rivals until now, because of this physical presence requirement.
Perhaps not surprisingly, the fact of this discrepancy in the need to collect and remit sales taxes, and the disadvantage it created for in-state, sales tax collecting bricks-and-mortar retailers, was a major contributing factor behind calls for a change in the law.
Nor are such concerns unique to the US.
In March, a gathering of around 300 participants attending a global forum on value-added tax (VAT) in Melbourne – sponsored by the Organization for Economic Co-operation and Development (OECD) – voted unanimously to support new measures aimed at ensuring the collection of sales and value-added taxes from e-commerce retailers around the world.
In particular, the discussions in Melbourne focused on the need to make e-commerce “marketplaces” liable for the VAT/GST (goods and services tax) on sales made by various online traders who typically make use of their e-commerce platforms.
“These new measures provide governments with the tools needed to ensure that online platforms play their part in the collection of VAT/GST,” the OECD’s head of tax policy, David Bradbury, said in a statement released after the meeting ended.
“They will also level the playing field for those on our high streets and in our malls, who have had to compete against online competitors enjoying a tax advantage.”
Meanwhile, some experts say further legal challenges could arise around transactions carried out over, for example, blockchain networks.
There have also been moves in Congress to overturn the Wayfair ruling, by such lawmakers as Montana Senator Jon Tester, who filed his “Stop Taxing our Potential” (STOP) Act within days of Wayfair being handed down last June, then re-introduced it just days into the new session of Congress in January.
Long-time observers of the sales tax debate say such legislative efforts are unlikely to succeed.
“The overturning of Quill was perhaps inevitable,” said Pablo Garciga, Director of State and Local Tax Services for Funaro & Co. PC, who for the last several years has been watching with interest the efforts to achieve this goal in the US Supreme Court. Garciga is referring here to an earlier Supreme Court ruling, made in 1992 – Quill Corp. v. North Dakota – which established that states did not have the right to impose a sales tax on entities that lacked a “physical presence” inside the state’s boundaries.
(That case was typically referred to as “Quill”, especially by its opponents, who recently have been quoted as saying they were seeking to “kill Quill” in the courts.)
“It was a somewhat unique aspect of US Supreme Court jurisprudence to carve out use taxes for special treatment – while permitting states to impose other taxes without requiring taxpayers to have a physical presence in a state,” Garciga added.
“Whether one agrees or disagrees with Wayfair, [though], the truth is that although there are some unsettled legal issues surrounding the application of economic nexus principles in the context of sales and use taxes, it is, in all likelihood, here to stay.”
Republican Representative Jim Sensenbrenner, from Wisconsin, also weighed in with a bill he calls the Online Sales Simplicity and Small Business Relief Act, which among other things would raise the threshold at which non-in-state businesses would be required to collect and pay state sales taxes.
One thing most agree on is that prices are likely to rise, both for vendors and consumers.
Recommended Next Steps
Historically speaking, states have only been able to impose tax on businesses which meet a certain level of physical presence in-state. Following last June’s Wayfair ruling in the Supreme Court, this is no longer the case. Businesses providing services may not have an issue, but international sellers that ship products to the US can have a sales tax registration and remittance requirement now if they fall afoul of the new economic nexus rules.
Have a question? Contact Darlene Hart.