Time to read: 3 minutes
What is the Court Case?
The U.S. Supreme Court ruling in South Dakota v. Wayfair in 2018 prompted non-U.S. companies and their subsidiaries that sell goods or services in the entirety of the U.S. to reassess their state sales tax obligations. 5 years later we review the implications thereof on the current GST landscape.
Previously, the 1992 Quill Corp. v. North Dakota case established that companies must have a physical presence in a state to be obligated to collect sales tax. This meant that many non-U.S. companies were not subject to U.S. state sales tax collection. However, the Wayfair decision and the subsequent implementation of sales tax economic nexus requirements by many U.S. states have changed this. Now, many non-U.S. remote sellers may be required to collect and remit sales tax in U.S. states, even without a physical presence.
The Wayfair decision was driven by a South Dakota law that imposed sales tax nexus on any seller with either more than USD100,000 of in-state sales annually or at least 200 transactions to in-state purchasers annually, regardless of physical presence.
In light of these changes, foreign companies selling into the U.S. without a physical presence must now understand and implement sales tax collection regimes. They must consider factors such as whether they exceed a state’s sales tax economic nexus threshold, whether the product or service sold is taxable in that state, and whether an exemption applies.
All remote sellers with significant sales to U.S. purchasers should consider undergoing a ‘Wayfair check-up’. This would involve a thorough analysis of the issues mentioned above, as well as the company’s overall nexus profile and the practical aspects of collecting and remitting sales tax, such as collecting exemption documents, considering system implications, and reviewing overall processes.
How have things developed post-Wayfair?
Following the Wayfair ruling, it was predictable that states and localities would start implementing sales tax economic nexus laws and issuing guidelines similar to those of South Dakota. In fact, some states had already prepared laws that directly contradicted the Quill ruling, waiting for the Supreme Court’s decision to start enforcing economic nexus. For instance, New York Tax Law Section 1101(b) (8)(iv) had set sales tax economic nexus standards that remained inactive for nearly three decades until the Wayfair decision. A few months post-Wayfair, New York released guidelines informing taxpayers of its plan to enforce these dormant provisions, retroactively effective from the date of the Wayfair ruling.
While the introduction of sales tax economic nexus laws was anticipated, the speed at which these laws were adopted across all states with sales taxes was surprising. Most states, barring a few exceptions, had effective economic sales tax nexus standards in place within two years of the Court’s ruling. This is in contrast to the ongoing struggle of states for over ten years on how to tax new technologies in an increasingly service-based economy.
As of January 1, 2023, all states with a sales tax had implemented sales tax economic nexus.
Complexities that still exist:
Regardless of whether it was anticipated or not, there has been little advancement by states since the Wayfair decision to further align sales tax definitions, taxability, sourcing, rates, filing frequencies, and compliance duties. The absence of standardization is a well-known issue for sales tax experts. However, as the scope of filing expands, the difficulties faced by remote sellers and marketplace facilitators become increasingly complex. To streamline your understanding contact one of our compliance experts.
