The Sales Tax Challenges of Non-U.S. businesses in a Post-Wayfair World
Online retail sales in the U.S. are projected to reach $523 billion by 2020; that makes the US market very attractive indeed for businesses around the world, especially for those businesses that do not have a physical presence in the US and would, therefore, find it much more difficult to do business in the US without online sales technology. See for example, www.thestreet.com/story/13940645/1/how-foreign-companies-can-successfully-infiltrate-the-u-s-online-retail-market.html and [www.digitalcommerce360.com/2018/07/02/ecommerce-giant-jd-com-heads-for-the-u-s].
That said, successfully establishing a viable e-commerce business in the US presents many challenges, especially for non-US businesses that might not be as familiar as their US business counterparts with the tax rules of doing business in the US. In the specific case of sales tax compliance in the 50 states, the recent decision of the Supreme Court in Wayfair to repeal physical presence as the only test of whether a state could tax a business has exacerbated that challenge for non-US businesses.
How so? Before Wayfair, non-US businesses did not worry very much about sales tax obligations in the fifty states because they often had no physical presence in the US at all. But now, other forms of presence, e.g., economic presence, will become a part of state nexus statutes and that could mean new planning, compliance and administrative headaches for companies in every state in which they plan to do business.
While complying with US law can be challenging, successful businesses will find ways “to work the system in their favor” so that they can compete favorable with US companies. But how do you actually do that. The only really settled issue is that physical presence is no longer the mandatory standard of nexus, but the fallout from that change is far reaching and far from settled. Just about every other issue will have to be reanalyzed in the new post-Wayfair framework. Here are some suggested next steps in addressing the sales tax issues for non-US businesses in each state.
- Understanding the issues that apply to all
- Understanding the issues that are unique to non-US businesses
- Understanding the current and changing compliance rules in 50 states, and
- Finding the expertise, tools and research support needed to effectively and efficiently apply those rules to each company’s particular circumstances in arriving at the best solution for each company in each state.
Understanding the issues that apply to all businesses.
The Streamlined Sales Tax Governing Board, in their “Emergency Meeting” of July 19, 2018, raised many issues related to the implementation of an economic nexus standard, including:
- How would drop shipments be affected?
- What type of sales transactions (gross sales, gross revenue, taxable sales) go towards meeting thresholds?
- Once the threshold is met, how soon must a remote seller start collecting?
- How will thresholds and collection apply to start ups?
- Once nexus is established, does a seller always have it in that jurisdiction?
- If a mail order seller converts to a brick and mortar seller, does it lose nexus?
- What if a purchaser knows they have met the threshold but the seller does not collect?
- Do nontaxable sales push a seller to the threshold? What about sales to exempt users or exempt entities?
Understanding the issues that are unique to non-US businesses
Among the issues that non-US companies will have to address include:
- What are the sales tax effects if a non-US seller sales goods through a US subsidiary?
- What are the sales tax effects if a non-US seller sales goods and services directly to customers?
- What are the sales tax effect if a non-US seller sales goods on a marketplace platform?
- What are the relevant differences between Nexus v Permanent Establishment?
- What are the relevant differences between Sales and Use Tax v. Value-Added Tax?
- Will states provide voluntary disclosure and amnesty?
- Does the Foreign commerce clause in the US constitution allow states to subject foreign companies to the same nexus standard as US domestic companies?
- Would future federal legislation on state sales taxes affect US and non-US businesses differently?
- What is P.L. 86-272 and how does that affect sales tax obligations of non-US businesses?
- For remote buyers, charging sales tax on purchases could be an issue. What structure will help to manage procurements prospectively?
- Does an international seller have to form or create a U.S. entity to register for sales tax collection purposes? Is an EIN number needed to register? Is a U.S. bank account needed?
Understanding the rules to address the issues in the 50 states of both US and non-US businesses
- Do a Nexus Study
- Review your:
- taxability matrix
- taxable services and exemption matrix
- Rate and boundary database
Finding and implementing the tools and support needed
It is virtually impossible to keep up with the changes brought about by the Wayfair decision without software and high-level tax research to track and implement these changes on a continual basis. The systems analysis and review should include actions like:
- Review and update internal compliance systems as needed
- Review Use Tax accrual and exemption certificate procedures
- Need to understand current and future online marketplace obligations for sales tax collection and remittance