This decision has a major impact reaching far beyond e-commerce. It reverses a well-established case-law dating back to 1967, and confirmed in 1992, in which states could only require a business to collect and remit sales tax if they had a physical presence (employee, property) within the state.
The previous case-law, which was established well before the emergence of E-commerce, gave on-line merchants a significant competitive advantage by allowing them to sell in states without collecting sales tax when they didn’t have physical presence in those states.
When sales tax has not been collected by the seller on taxable goods or services, the customer is required to self-remit use tax to the state. Many states experienced difficulties enforcing this obligation, leading to an overall loss of state revenue on an annual basis in the order of US$40 billion.
Implications for foreign companies
First of all, one must remember that US states are not bound by double taxation agreements in place at the federal level. State legislation which will result from this decision will therefore very likely apply to foreign companies who sell in US states without having a physical presence therein.
The scope of “sales tax” legislation may be limited.
Contrary to VAT, “sales tax” only applies to sales to end consumers, and therefore does not affect sales to distributors intended for resale (a resale certificate should however be provided by the distributor). Furthermore, as a general rule, “sales tax” does not apply to most services. That said, one should still verify the specific state legislation as there are more and more exceptions.
Like income tax nexus criteria, states may adhere to an economic sales tax nexus standard requiring remote sellers with no physical location in the state to collect and remit sales tax only if they exceed a certain threshold (minimum standard). For example, the legislation in South Dakota which was subject to the Supreme Court decision has established that remote sellers with no physical location in South Dakota will not be required to collect and remit sales tax if in-state sales are less than $100,000 or include less than 200 transactions.
This legislation could be implemented very quickly. Many states, including South Dakota, have legislation that was already voted on and which could be implemented immediately.
Others will have to draft and vote on new legislation which could be in place by the end of the year.
It is still far too early to understand all the implications of this decision. However, it is possible that certain businesses will have to register and collect sales tax in additional states, but that will depend on the specific state legislation. For example, certain small businesses may still benefit from “safe harbor” provisions (minimum standard) and the South Dakota legislation may serve as a model for other states.
It is also still unclear what the impact of this decision might be for prior years. Although the South Dakota legislation will only apply prospectively, certain states may want to pursue uncollected taxes retroactively.
We will monitor legislative developments in the coming months with our specialist partner, David Hughes, partner at the law firm of Horwood Marcus & Berk Chartered.
In the coming months, we will publish updates regularly as things progress. Please also see our previous articles dated February 1st and May 2nd.
Relation with global E-commerce taxation
This decision, which most notably addresses the loss of state revenue due to the generalization of E-commerce in the US, is very likely to be the precursor to a review of global E-commerce taxation and specifically of the definition of permanent establishment included in double taxation treaties, as also suggested in the March 2018 OECD report “Additional Guidance on the Attribution of Profits to Permanent Establishments, BEPS Action 7”.
This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.