The US Supreme Court’s landmark decision in South Dakota v Wayfair, Inc is expected to result in many more overseas businesses having to account for US sales tax in future.
Under existing rules, businesses selling goods and services to US consumers are required to account for State sales taxes, but only where the seller has a significant ‘nexus’ with the customer’s State. It has been a long established principle that a nexus only exists where the seller has a physical presence in the consumer’s State, such as a warehouse or retail premises.
For States such as South Dakota, the boom in sales by out of State and overseas online retailers has resulted in millions of dollars of lost revenue. The physical presence rule means that ‘bricks and mortar’ retailers suffer a competitive disadvantage, as they have to account for sales taxes, whereas out of State retailers sell their goods and services tax free.
The case for tax collection
The State of South Dakota sought to overturn the established position by treating sellers as having a nexus with the State, and therefore an obligation to account for State sales taxes, where, on an annual basis, they either:
a) Deliver goods or services to the State with a value of more than US$100,000; or
b) Have 200 or more separate transactions involving the delivery of goods or services into the State.
The Supreme Court agreed with the new nexus rule imposed by South Dakota, describing the existing physical presence rule as:
“…a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced.”
It is expected that other US States will follow suit, by introducing a new nexus rule similar to the above. This would have significant implications for non-US businesses selling goods and services to consumers in the US, who could find that they have sales tax obligations in multiple US States in the future.
The greatest impact is likely to be on online retailers. For example, an online retailer with relatively low value sales of downloads, could find it has sales tax obligations as a result of making 200 or more separate sales to consumers in a particular State in a year.
Businesses making sales to the US should take local advice from a member firm of HLB International.
Please speak to your usual Menzies contact about our international accounting services.