In 2018, the U.S. Supreme Court issued a landmark decision that changed the U.S. sales tax landscape for Canadian businesses selling in the U.S., either stateside or electronically (the Internet).
CONTEXT
Sales tax registration requirements are based on the seller’s physical presence in a particular state prior to Wayfair’s decision. The supplier or retailer is only required to register and collect state sales tax if the supplier or retailer has a certain level of physical presence in the state, such as the presence of on-site employees or equipment, inventory, or other business premises.
Sales tax in the United States is based on the retail tax system. It is the final consumer of the goods who pays the tax. Exemptions exist in the distribution chain from manufacturer to retailer. It is primarily tangible assets that are taxed. Some state tax services.
South Dakota passed an economic presence-based law in 2016 that directly violates the physical presence standard. The new law makes it mandatory for any sellers with more than $100,000 in gross sales or more than 200 transactions within their borders to register and collect sales tax, regardless of whether they meet the state’s physical presence test.
Several retailers, including e-commerce company Wayfair, have been challenging the constitutionality of the new law to the U.S. Supreme Court, which upheld the law’s compliance by ruling that the physical presence test was “unsatisfactory and incorrect”. This is one of the most significant sales tax changes in the United States in recent years.
The states’ response was immediate. To date, the vast majority of them have adopted the “economic ties” rule. As of August 15, 2019, only two states (excluding the five states that do not collect sales tax) have yet to pass laws recognizing economic ties. These are Florida and Missouri. As a result, a total of 43 states have adopted economic linkages at different times since June 21, 2018, compared to about 20 on the same day in 2018.
ECONOMIC NEXUS
South Dakota has set a threshold that sellers must register for sales tax if they make $100,000 or more in sales or 200 transactions within its borders. Most states have adopted the same economic connection threshold. However, some have adopted higher sales (between $250,000 and $500,000) as the threshold.
In addition, many jurisdictions have waived transaction volume standards, while others, such as New York, require transaction volume and sales volume standards to be met in order to establish economic ties within their territories…
THRESHOLD CALCULATION
The sales considered in the above threshold calculations vary by state. In most states, gross sales (taxable sales, tax-exempt sales, resale sales) are used to determine whether an economic connection has been established. Other states, like Illinois, only consider retail sales (and therefore do not include resale sales), while some, like Pennsylvania, only consider taxable sales.
IMPACT AND CHANGES TO YOUR COMPANY
Therefore, many Canadian entities that sell in the U.S. but do not have a physical presence in the U.S. should expect to review their Nexus analytics for sales tax and possibly register in a new state. Since excise tax regulations vary from state to state, the laws of each jurisdiction must be analyzed.
Complying with all these different rules can be a real headache for businesses outside the US. Twenty-four (24) states have come together to form the Streamlining Sales Tax Administration Council to help simplify sales tax administration for principal sellers.
