Foreign Remote Sellers: Meet Wayfair and State Tax Laws (All 50 of Them)
If your non-U.S. business has inbound sales in the United States, you and your U.S. subsidiaries may have different state sales tax responsibilities resulting from the Supreme Court’s decision in South Dakota v. Wayfair. Wayfair overturns the requirement from the court’s 1992 ruling in Quill Corp. v. North Dakota, which held that sellers must have a physical presence in a state before that state can require you to collect sales tax.
Because many non-U.S. companies selling into the United States have physical locations outside U.S. borders, they have not previously been subject to a state sales tax collection obligation. But under Wayfair — and because of the economic nexus requirements that many U.S. states have implemented in response to the ruling — you needn’t have an actual physical presence before a state can make you collect sales tax on the goods and services you sell.
This change could drastically affect your company, and it’s important that you evaluate your operations in light of it.
50 U.S. states, 50 different state tax laws
Many foreign businesses are surprised to learn that each U.S. state has its own set of laws and determines whether to impose a sales tax (45 of our 50 states do) and what products and services are taxable.
Among this variety, however, there is a general rule: all sales of tangible personal property are taxable unless a specific exemption applies. The taxability of services and digital goods varies widely, with some states taxing a very narrow set of services, and others taxing them broadly. In most states, the tax is imposed on the ultimate purchaser of the taxable good or service, but the seller has the responsibility to collect and remit the tax to the state.
Wayfair triggers state economic nexus laws across the United States
The impetus for the Wayfair decision was a South Dakota law that asserted sales tax nexus over any seller with either $100,000 or more of annual in-state sales, or at least 200 transactions to in-state purchasers annually — even if the seller had no physical presence there (a so-called “remote seller”).
While the Supreme Court’s decision did not determine that South Dakota’s law was immediately effective (the decision is pending a review back in the South Dakota courts), it is widely believed that the economic nexus standard used by South Dakota will be upheld and enforceable. This is because, when viewed in the context of other elements of South Dakota’s sales tax regime, it is not overly burdensome to remote sellers, including small businesses.
In response, many U.S. states have enacted economic nexus laws that are similar to South Dakota’s. About half of the states have a law in place so far and more are adding to their laws each month. Their effective dates vary, but many went into effect on October 1, 2018.
Non-U.S. businesses should evaluate operations in light of Wayfair
In the past, foreign companies selling inside the United States without any physical presence in the states did not have a reason to understand or implement sales tax collection regimes. Now that you do, it is important to evaluate your U.S. operations in light of this change.
There are many issues to consider:
- Whether your business exceeds a particular state’s economic nexus threshold
- Whether the product or service you sell is taxable in the given state
- Whether an exemption applies
- Whether a U.S. state would have the ability to legally enforce a sales tax assessment against a business with no connection to the United States (though this issue has not been tested by the courts)
A comprehensive analysis of these particulars, as well as your company’s overall nexus profile, can help you weigh the practical aspects of collecting and remitting sales tax (e.g., collecting exemption documents, systems considerations, and overall process review).
How we can help
Remote sellers outside of the United States should conduct a sales tax nexus assessment. CLA’s international tax strategists work closely with our state and local tax professionals and can help guide you through this critical analysis.