The decision is important especially for enterprises with online-shops as well as foreign companies delivering to customers in the United States without having physical shops, offices or representatives abroad. We asked Gretchen Whalen, Certified Public Accountant and Principal of our Nexia International-partner CliftonLarsonAllen (CLA) in Tampa, which impacts she expects from the decision and how companies should react.
© Gretchen Whalen, Certified Public Accountant and Principal, CliftonLarsonAllen (CLA), Tampa (USA)
Which activities of a company are subject to the sales tax in the US?
It depends on the state. Forty-six states impose a sales tax and each state has the ability to impose its own laws regarding which products and services are subject to tax. Sales tax is generally imposed on sales of tangible goods, but many states also impose sales tax on sales of services and software. For instance, in Florida, very few services or electronically delivered software or goods are taxable, but Texas taxes many services.
Which party has to withhold and pay the tax?
Generally, the tax is imposed on the end user of the taxable good or service, but a seller with a taxable presence, or “nexus” in the relevant state is required to collect the tax from the purchase and remit the tax to the revenue authority. If the seller does not have nexus with the state, then the purchaser is required to self-remit the tax.
Is it a federal tax or a state tax?
All sales tax in the US are a state and/or a local tax. Many states collect the tax on behalf of the localities.
What is understood by the term “nexus”? Is it legally defined?
Nexus is a concept which means that a jurisdiction has sufficient taxable presence to subject a person or business to tax. The concept arises from the US constitution and has evolved through several court cases. For sales tax purposes in the US, prior to the recent South Dakota vs. Wayfair US Supreme Court decision, the business had to have a physical presence, generally people or property located in a state, to have nexus.
What changes have arisen as a result of the Wayfair decision?
The Wayfair decision has effectively removed the physical presence nexus standard. The court found that it is reasonable for a state to impose an economic presence nexus standard, similar to the state of South Dakota which asserted that a business has nexus if it has either US $100,000 or 200 transactions into the state. After this decision, several other states created economic nexus laws and/or began enforcing laws they already had.
Is the term “nexus” correspondent with the term “permanent establishment for income tax purposes”?
No, it is not. Nexus can be created by having an employee based in or travelling into a state to solicit business, utilizing an independent contractor in a state, or by having property in a state, even if it is inventory in a rented warehouse. Generally speaking, it is easier to create nexus than it is to create permanent establishment. Also sales tax and some other indirect taxes such as gross receipts based taxes apply whether or not the business is subject to federal income tax.
Does an “economic nexus” trigger sales tax in all states?
Not yet. As of January 1st 2019, 35 states have economic nexus laws, many of which became effective on October 1st 2018. Many other states are currently considering implementing an economic nexus law.
Which foreign companies are affected by the changes and what impact will this have for them? Is the new definition of the term nexus only relevant for foreign companies with subsidiaries in the US?
Any foreign company selling goods or services into the US has the potential to be impacted. When the non-U.S. company’s sales meet the test for establishing a meaningful and substantial presence in a state, it would need to collect and remit sales tax in that jurisdiction.
A foreign company with a subsidiary in the US is more likely to have created nexus in the past due to the more substantial presence in the US of a related party. This should be evaluated before beginning to register in the state. Companies with a historical exposure in a state are generally eligible to participate in that state’s VDA program for any tax type they have never previously filed/paid there (e.g. sales, income, franchise, gross receipts). The primary eligibility criteria for most states’ VDA programs is that the company must never have had any prior contact with the state, including notices, registrations, questionnaires, etc., regarding the specific tax type. As a result, if a company chooses to register and to collect sales tax as a result of Wayfair that company would likely forfeit its ability to participate in that state’s VDA program for sales tax purposes.
How can CLA support?
Complying with a growing number of state tax filing obligations could be a full time job. CLA’s state and local tax professionals can help ease the burden. We offer sales tax compliance outsourcing and can give you a sales tax nexus assessment (“Wayfair checkup”) so you can understand your exposure under these new laws. We are actively monitoring sales tax economic nexus updates from each state, so you can be sure that you understand applicable requirements to collect and remit sales tax.
