Wayfair’s ‘ear worm’ struck a chord with tax collectors across the USA who expect e-commerce vendors to collect and remit state sales taxes. Do you sell into the USA by e-commerce?
Taxation can be slow to change, but legislatures, courts and other government bodies eventually cause the tax laws to catch up. That’s what happened last year with a landmark US court decision affectionately known as Wayfair. (The full title is South Dakota v. Wayfair, Inc.).
This decision from the US Supreme Court brought sales tax into the 21st century by finally ushering e-commerce into the sales tax tent. Now e-commerce companies—even Canadian companies—will need to think about collecting state sales tax. And while Wayfair was triggered by e-commerce, other Canadian companies will also feel the impact when doing business with the US.
In this issue of The TaxLetter, regular contributor Mark Goodfield, aka The Blunt Bean Counter, yields the floor to his colleague Naomi Cutler, Senior Manager, US State and Local Tax at BDO.
Ms. Cutler reflects on the events leading up to this key decision—and how Canadian business owners and leaders need to adapt.
How US state sales tax works
Most US states impose sales tax on purchases of goods, and many also tax some services. For those states with a sales tax, the tax revenues often account for the largest income line item in the budget.
Businesses resident in the state are required to collect the tax. Over 25 years ago, the US Supreme Court ruled that out-of-state businesses must have a physical presence in a state for sales tax collection laws to apply to them.
E-commerce was skirting sales tax
With the rise of e-commerce came deficits in state budgets. Most e-commerce retailers were not required to collect sales tax, so many transactions were going ‘un-taxed’. Bricks and mortar stores were also suffering from lost revenue, partially attributable to not being able to compete with the ‘sales tax discount’ available to consumers who purchased online.
Congress drafted several ‘Marketplace Fairness Acts’ in efforts to create sales tax parity between online retailers and their competitors with retail storefronts. None of these passed through both the House and Senate. Vocal states like New Hampshire, the Live Free or Die state, derided the idea that their local businesses should be stuck with the headache of collection of any state’s tax.
Meanwhile, Supreme Court Justice Anthony Kennedy made a comment in passing, suggesting that it was time to bring a new case to the Supreme Court to test prior rulings on physical presence.
South Dakota challenge set new precedent
Several states took up the challenge, and South Dakota was the first to make it to court. Its legislature drafted a law that looked to be unconstitutional: according to the law, an out-of-state business would need to collect state sales tax once it has $100,000 of sales to South Dakota in a year or had 200 transactions in a year. The company Wayfair and several other similar businesses did not abide by the new law. The state of South Dakota took them to district court, and eventually the case made its way to the US Supreme Court.
The Wayfair ruling came back on June 21, 2018: The requirements set out by South Dakota seem reasonable. Physical presence was no longer required to make companies liable for sales tax. (Fittingly, Justice Kennedy wrote the judgment. It was one of his final decisions before retiring.)
The world after Wayfair
Since then, many states have enacted laws similar to South Dakota’s, and have begun to enforce those laws. The expectation is that there will now be a level playing field between bricks and mortar and e-commerce.
To be clear—the change in rules was targeted to recoup losses from e-commerce, but it reaches a lot farther than that. Many Canadian B2B companies have in the past successfully sold into the US market without sufficient presence in the US to trigger sales tax collection responsibilities. These rules may change that. What has not changed is that sales tax is still only collectable from the end user and that often machinery and equipment sales are exempt. Sellers should collect and retain sufficient documentation to maintain rights to these exemptions.
The changes brought about by Wayfair are very complex. Please contact your professional advisors or seek advice from a US state tax specialist to understand how this case impacts your business.
This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.
This is an edited version of an article that was originally published for subscribers in the April 2019 issue, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.
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