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Nexia Ebner Stolz

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Amendments to the US Sales Tax according to the Wayfair decision

In the United States many states impose a sales tax on products and services. Contrary to the former understanding the U.S. Supreme Court states in its decision of 18 June 2018 (South Dakota v. Wayfair, 17-494), that not only a physical but already an economic presence of an enterprise triggers the tax.

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) © 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.

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