U.S. sales taxes: The Wayfair decision
Over a year ago, the United States Supreme Court rendered an important decision that has changed the American sales tax landscape for Canadian companies that conduct sales south of the border, whether they are made physically on American soil or electronically (via the Internet).
Prior to the Wayfair ruling, the obligation to register for sales taxes was based on the sellers’ physical presence in a given state. Sellers and retailers had to register for and collect a state’s sales tax only if they had a certain level of physical presence in the state, for example, employees on the ground, equipment, inventory or brick-and-mortar locations.
U.S. sales taxes are based on a retail tax system, where the end consumer pays the tax. Moreover, there is an exemption system for the manufacturer-to-retailer distribution chain. It is mainly tangible goods that are taxed, although some states tax services.
In 2016, South Dakota passed a law based on economic presence, which runs directly counter to the principles of physical presence. Under the new law, any seller with over US$100,000 in gross sales or more than 200 transactions within the state’s borders has to register for and collect South Dakota’s sales tax, whether or not the physical presence criterion is met.
A number of retailers, including e-commerce company Wayfair, challenged the constitutionality of the new law all the way to the U.S. Supreme Court. The Supreme Court found that the physical presence rule was “unsound and incorrect,” thus confirming the constitutionality of South Dakota’s new law. This is one of the most significant changes in the area of U.S. sales taxes in recent years.
The various states were quick to react. The lion’s share have now adopted “economic nexus” rules. As of August 15, 2019, all but two states, Florida and Missouri (excluding five others with no sales tax), have enacted economic nexus legislation. The number of states that have adopted economic nexus has therefore risen from about 20 on June 21, 2018 to 43 since that date.
Economic nexus threshold
South Dakota set its threshold for compulsory vendor sales tax registration at US$100,000 in sales or 200 transactions in the state. Most other states have adopted the same economic nexus threshold, while a few have opted for a higher sales threshold (ranging between $250,000 and $500,000).
A number of jurisdictions have left out the transaction volume criterion, while other states, such as New York, require that the transactions and sales criteria both be met for economic nexus to be triggered on their territory.
The types of sales considered in the calculation of the threshold differ from one state to another. In most states, total gross sales (taxable sales, exempt sales, sales for resale) are used to trigger, or not, economic nexus. Other states, like Illinois, consider only retail sales (excluding sales for resale), and states such as Pennsylvania factor in only taxable sales.
Expected impact and changes for your company
A number of Canadian enterprises that sell to the United States and have no physical presence south of the border should plan to review their sales tax nexus analysis and, eventually, register with new states. Since commodity tax rules vary from state to state, sellers should analyze the legislation in each jurisdiction.
Compliance with all of these different rules can be a real puzzle for enterprises outside the United States. However, 24 states have joined together to create the Streamlined Sales Tax Governing Board to simplify the administration of sales taxes for sellers subject to economic nexus rules.
Benoit Vallée, CPA, CGA
Partner, Indirect Tax
Demers Beaulne S.E.N.C.R.L.
Member of the Orders's Working group
on taxation and commodity taxes
Sarah Gosselin, M. Fisc
Senior – Indirect Tax
Demers Beaulne S.E.N.C.R.L.