Are you a Canadian company selling goods to US customers? If so, the Wayfair decision might drastically alter your US sales tax exposure. As noted in our prior blog in April, the US Supreme Court handed down its decision in the case of South Dakota v. Wayfair on June 21, 2018. The holding in the case will result in a seismic shift in how states within the US can assess sales tax on transactions between out of state (and out of country) businesses and customers located within the US.
How were transactions previously taxed for sales tax purposes?
Previously under the 1992 case Quill Corp. v. North Dakota, the US Supreme Court had set the precedent that an out of state retailer (typically of tangible personal property) could only be subject to state sales tax if such retailer has a physical presence in the state. A business would generally be considered to have a physical presence in a state if it had employees or property (e.g., office space or inventory) present in the state. Although the rationale behind this rule made sense in part due to the administrative nightmares of complying with the literally thousands of separate sales tax jurisdictions within the US, it also effectively created a judicially sanctioned tax shelter for businesses who could conduct their businesses remotely. It should be noted that at the time of the Quill decision the internet operated at a tiny fraction of its current day capacity and remote sellers operated almost exclusively via mail order catalogs.
How does the Wayfair decision change state sales taxation?
The US Supreme Court decision in Wayfair has effectively adopted the economic nexus standard for assessing state sales tax in lieu of the physical presence standard required by Quill. An out of state business will have economic nexus within South Dakota if, generally speaking, during the year the business has: (1) more than $100,000 of gross revenue from taxable transactions with customers located in South Dakota; or (2) more than 200 separate taxable transactions with South Dakota customers.
How will the Wayfair Ruling Impact Canadian Companies selling to the United States?
The clear implication of the Wayfair decision is that there will likely be a mass rush of states adopting new sales tax laws that will mirror the far lower threshold of “economic nexus” that has been implemented by South Dakota. Any Canadian business that sells physical goods (as well as certain limited services) into the US will now have potential US sales tax withholding requirements, which if not met, could result in the Canadian business having to pay the sales tax out of its own pocket. Canadian businesses with customers within the US will now have to carefully track their sales by state in terms of both gross receipts and the number of transactions to customers within the state.
We can help
Our US Tax Group can help you assess the effect of the US state sales tax rules on your tax situations. For more details on US state tax rules and their possible impact, contact Eric Trumbull or your DMCL advisor.