If you’re a foreign (non-U.S.) seller making sales to U.S. consumers, you may have heard about the U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, Inc. Perhaps you’ve also heard about a something called “economic nexus” and are wondering how this new standard impacts foreign sellers.
In many of my prior “U.S. Sales Tax for Foreign Sellers” blog posts, I’ve addressed questions and concerns that foreign sellers have about sales tax. I work with foreign sellers from throughout Europe, Canada, Latin American, Australia and many other parts of the world - so I understand how the U.S. sales tax laws can seem especially confusing. And now with the sales tax rules and standards changing so rapidly as a result of the U.S. Supreme Court's decision in Wayfair, this creates even more questions for foreign sellers. Today, I’m continuing this trend (of addressing foreign sellers' questions) with a post written exclusively for foreign sellers to addresses questions about the U.S. Supreme Court’s decision in Wayfair, what “economic nexus” means, and to offer some guidance. The post is organized in an easy to follow “Question and Answer” format. If you have a question that you don't see answered - please post a comment at end of the post - I’ll also be updating this blog post as more questions arise.
So, without further delay, here are some common questions and answers to help explain the impact of the U.S. Supreme Court’s decision in Wayfair and economic nexus.
Question 1: I’ve seen many news reports about the U.S. Supreme Court’s decision in a case called South Dakota v. Wayfair and I noticed that many of these reports are saying that online retailers will have to start collecting and paying sales tax in every state! Is this true?
Answer 1: First let’s get the big question out of the way. On June 21, 2018, our U.S. Supreme Court issued their opinion in South Dakota v. Wayfair. I’ll explain more about the Wayfair decision in a bit, but the main thing to know is that this decision does NOT mean that every online retailer will be required to collect sales tax in every state. Yes, there have indeed been many news reports with headlines that say (or at least imply) that the U.S. Supreme Court’s decision means all online retailers will now have to pay sales tax everywhere, but this isn’t true at this time. What is true is that as result of the Wayfair decision and this new economic nexus standard many states are now following, some online sellers (including foreign online sellers) WILL be required to start collecting and paying sales tax in more states than they have had to in the past.
Question 2: I noticed in your answer to Question 1, you mentioned that foreign (non-U.S. based) online sellers may be required to start collecting sales tax in more states. I’m from a country that has a tax treaty with the U.S. – shouldn’t this mean that I can make sales to customers in the U.S. and not worry about sales tax?
Answer 2: This is a very common question I’ve been asked many times. It’s also a topic I’ve covered here SalesTaxSupport.com. In my “Tax Treaties and U.S. Sales Tax Nexus: What Foreign Sellers Need to Know” blog post, I explained that our states are not a “party to” or “bound by” any bi-lateral tax treaty that our federal government enters into. A foreign seller might very well be protected from U.S. federal taxation on its business profits if the seller satisfies the applicable articles of its country's bi-lateral tax treaty with the U.S. For instance, many tax treaties are based on the OECD Model, and use the same or similar definition of a "Permanent Establishment" (having a Permanent Establishment, or PE, will impact treaty protection). Additionally, many tax treaties state that "the maintenance of a stock of goods or merchandise ... for the purpose of storage, display or delivery" does not create a PE. However, storing a stock of goods or merchandise (inventory) in a U.S. fulfillment center does creates sales tax nexus in all states that impose a sales tax. The point of my answer here is that a bi-lateral tax treaty will not protect a foreign seller from the requirement to comply with our U.S. sales tax laws. (I encourage you to read my prior Tax Treaties and Sales Tax post and this post on "U.S. Sales Tax for Amazon FBA International Sellers" for more on this topic.)
Question 3: Can you explain more about significance of the U.S. Supreme Court’s decision in Wayfair and about “economic nexus.” How are the two connected?
Answer 3: Absolutely! It’s very important to talk about the significance of the Supreme Court’s decision in South Dakota v. Wayfair, as well explain what "economic nexus" is all about and how the two are connnected.
In 2016, the State of South Dakota passed a law which requires certain out-of-state sellers (we use the term “remote sellers” to refer to “out-of-state sellers") to register for a South Dakota sales tax permit, collect sales tax from South Dakota customers and remit (pay) sales tax to the South Dakota Department of Revenue if their sales or transactions reached certain thresholds. Remote sellers (this includes foreign sellers) that are subject to South Dakota’s registration, collection and remittance duties are those that during the previous or current calendar year;
- made more than $100,000 in gross revenue from the sale of tangible personal property (goods), products transferred electronically, or services delivered into South Dakota; or,
- made sales of tangible personal property (goods), products transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
The South Dakota law says that remote sellers which meet either of these “economic nexus” thresholds are treated “as if” they had a physical presence in the state. Because meeting either threshold can subject a remote seller to the South Dakota economic nexus law, even remote sellers whose South Dakota sales are significantly less than $100,000 may still be subject to the South Dakota law if they meet the "200 or more separate transactions" threshold. Also, under the South Dakota law, a remote seller is no longer required to have an actual physical presence in the state to be subject to South Dakota’s sales tax obligations. Prior to Wayfair, states were prohibited from imposing their sales tax obligations on a remote seller if the seller did not have a physical presence in their state. This was due to the 1992 U.S. Supreme Court decision in Quill. By enacting a law that imposed sales tax obligations on sellers that had no physical presence in their state, the South Dakota law clearly violated Quill. The South Dakota law was challenged and in January 2018, the U.S. Supreme Court agreed to review South Dakota v. Wayfair and decide whether the physical presence standard should continue to apply. On June 21, 2018 the U.S. Supreme Court announced its decision – which overturned the physical presence rule. This was significant!! This meant that states were no longer restricted from imposing their sales tax obligations only on businesses that have a physical presence in their state; states are free to adopt “economic nexus” laws and policies similar to South Dakota’s - and many states already have! (If you'd like to read more about South Dakota's economic nexus law, see my prior SalesTaxSupport.com post, “Economic Nexus: The ‘New Normal’ or the Demise of Quill?” or this PrietoDion SALT Whitepaper.)
Question 4: I’ve heard that South Dakota isn’t the only state that has an “economic nexus” law. What other states have economic nexus laws? Is there anything I should be doing to make sure I am complying with these new laws?
Answer 4: As of August 1, 2018, more than 25 states have adopted economic nexus. We’ve created a special blog post on this topic that includes an updated chart listing every state that has adopted economic nexus, the economic thresholds (sales and/or number of transactions in each state that must be exceeded for the law to apply), when the law is effective (many of these laws are effective already or will be effective by the end of 2018), as well as links to the different state websites and resources where helpful information can be found. (See my blog post, “States Follow South Dakota: A By-State Guide on Economic Nexus,” for the economic nexus chart.) This is an extremely helpful resource that I'll be updating continually as new states adopt economic nexus. One thing you’ll notice when viewing this chart, is that in many of the states, the economic nexus thresholds are the same as in South Dakota’s (more than $100,000 in sales or 200 or more separate transactions). The final point here is that the sales tax laws are changing rapidly – if you’re a foreign seller making sales into any of the economic nexus states, you should consider seeking the proper advice.
Question 5: If many of the states have economic nexus laws now, does this mean that physical presence doesn’t matter anymore?
Answer 5: Even though many states have adopted economic nexus for sales tax, and many more are expected to, the economic nexus rules are in addition to the physical presence nexus rules. Even though every state has its own laws and rules, every state that has sales tax says that having a physical presence in their state creates sales tax nexus - these laws and rules still apply. This means that states now have more ways to require remote sellers to comply with their sales tax laws. They can still require compliance if a seller has a physical presence, such as product inventory, in their state but now the states can also require compliance from sellers with no physical presence but that meet the economic nexus thresholds. As I mention in Answer 1, the Supreme Court decision in Wayfair does not means all online sellers will have to pay sales tax everywhere at this time, but it does mean that some online sellers (including foreign sellers) WILL be required to start collecting and paying sales tax in more states than they have had to in the past.
Question 6: I understand the Wayfair outcome was significant and that many states are adopting economic nexus - but as a foreign based seller, can the U.S. government or the states really enforce their laws against me?
Answer 6: Unlike the VAT and GST found in many countries, sales tax is not a federal tax. Therefore, our federal taxing agency, the Internal Revenue Service (IRS), does not administer sales tax. Our individual states, which are sovereign governmental and powerful bodies, are responsible for administering their state's sales tax. As I explained in Answer 2, our states are not bound by any tax treaty the U.S. government enters into. Additionally, the state sales tax laws do not exclude “foreign based sellers” from their definition of a “remote seller” subject to their economic nexus rules. (For instance, in this notice from the state of Michigan about its economic nexus policy, the notice specifically says that "the phrase 'remote seller' or 'out-of-state seller' refers to sellers (including foreign sellers) that sell tangible personal property through the internet, catalogs, mail order, or any other similar method.") Therefore, it’s important to know these laws do apply to foreign sellers. For sellers who have assets in the U.S., such as product inventory, customer receivables, or a U.S. bank account, states have the authority to seize these U.S. assets as a way of enforcing their laws. Generally, a state would only resort to aggressive means after making numerous attempts to bring the foreign seller in compliance. Still, it’s important to know that states can enforce their laws against foreign sellers.
Question 7: Is there anything else I should know? Anything I should be doing?
Answer 7: Quite honestly, there is so much more to know and consider. If you’re already selling in the U.S. and haven’t evaluated your nexus in the various states, you should seek the advice of a qualified advisor – preferably one who deals extensively with foreign sellers (such as your author here). Foreign sellers have specific considerations and need special advice on things such as whether they should consider organizing a U.S. entity, how their foreign entity is impacted by other types of taxes – such as state business taxes, state privilege taxes, and federal corporate taxes (even if a bi-lateral tax treaty protects a foreign seller from federal corporate taxation, tax filings may still be required). Also, foreign based sellers who wish to get into compliance with the sales tax laws may not be able to utilize the online sales tax registration systems available in many states if their only address is a foreign address and none of their shareholders, directors or officers are U.S. citizens. (See my two prior posts, “International Sellers and U.S. Sales Tax Registration: 3 Key Issues” and “7 Points Foreign Sellers Should Know about U.S. State Taxes” for more guidance on these topics.) I also suggest reviewing the Economic Nexus chart and monitoring sales and transactions into the economic nexus states to determine if the economic nexus thresholds have been met. As mentioned in Answer 5, physical presence nexus is still alive and well. If you’re using a fulfillment partner in the U.S. and store your product inventory in a state, that creates an obligation to comply with the sales tax laws of the state where your stock is stored. If you’re selling on Amazon, and utilize the FBA service, you likely also have sales tax nexus in several states as a result of Amazon’s policy of distributing products among various fulfillment centers (see my prior post “U.S. Sales Tax for Amazon FBA International Sellers”). There really is so much to know and seeking the proper advice is critical.
- Well there you have it, Questions and Answers on Wayfair and economic nexus written specifically for foreign sellers. If you have additional questions, please feel free to post a question or comment below. I’ll continue to update this post and will be adding even more Questions and Answers.
- If you’re uncertain as to how economic nexus impacts your business, or would like to discuss your situation further, please feel free to contact me via the link in my Author's Box below, via the "Consultation Request" box below, or via my firm's webpage here at SalesTaxSupport.com.
Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:
- Wayfair & Economic Nexus for Foreign Sellers: Key Sales Tax Questions
- U.S. Sales Taxes: Filing Frequency for International Sellers
- 7 Key Points Foreign Sellers Should Know about U.S. State Taxes
- Do International Sellers Registering for Sales Tax Need a U.S. EIN?
- International Sellers and U.S. Sales Tax Registration: 3 Key Issues