18th March 2020
Nearly all US states presently operate a sales tax regime, levying an average rate of 8.5% payable by end customers. Each state implements its own sales tax rules independently of the federal tax system, meaning that businesses must consider their compliance with local laws on a state by state basis.
The recent Wayfair case has drastically increased the scope of all state sales taxes and has wide ranging implications for all businesses who make sales in to the US, whether or not the seller has any physical presence in the US. The businesses most likely affected are those that sell their products/services remotely to the US.
What is the Wayfair Case?
State laws dictate that a business should have a substantial nexus in a US state for it to be subject to local sales tax obligations.
Prior to 2018, a nexus was commonly judged to be a physical presence, such as occupation of office or warehouse space, or the presence of representatives or sales agents in the relevant state.
With the exponential rise of e-commerce and distance selling, it has become increasingly challenging for states to impose local level sales taxes, because the pre-2018 nexus definition is often unmet.
This changed significantly in June 2018 when the Supreme Court ruled in favour of South Dakota against two online retailers, Wayfair Inc. and Overstock Inc., in its definition of a nexus as not only a physical, but also an economic presence.
In the case of South Dakota, this test would be met by a company that made over $100,000 in sales, or having 200 separate sales transactions to the state.
By late 2019 all sales tax operating states had outlined their own nexus definitions with sales thresholds ranging from $100,000 to $500,000. Some also imposed transaction volume measures of up to 200, but this is not a uniform application.
How is it relevant to the UK business who trades with the US?
Many UK businesses selling to US customers have previously enjoyed exemption from local sales taxes by not having a physical presence there. The Wayfair ruling changes this, and UK businesses should now consider their compliance with state requirements wherever their products or services are delivered.
Much of the focus on Wayfair has been around online businesses selling goods, however, it has implications for any remote business, including sellers of software and digital products.
Furthermore, the Wayfair case has given resurgence to an existing rule that we understand was rarely invoked in practice. That rule extended the physical presence nexus where the seller had a connection in the state by affiliation. For example, if a UK seller has a US subsidiary, the UK seller was deemed to have a physical presence in the state and liable to US sales tax. While Wayfair has not changed this rule, its effect is to shed light on historical non-compliance and states will now seek to apply it to collect any sales tax liabilities prior to Wayfair.
What action should be taken now?
UK businesses should develop a detailed understanding of their US sales activity on a state by state basis. This should include the nature of revenue and whether it falls within the scope of the relevant sales tax legislation. The key action points are therefore:
- Identify which states the business sells to and the transaction value and volume by each state.
- Consider the nexus requirements of the relevant states, including physical and economic presence and sales thresholds. Please see this table.
- Determine the nature and/or type of sales being made to the US as not all services/products are subject to sales taxes – please speak to your usual haysmacintyre contact who would be happy to contact one of our US tax advisory firms on your behalf.
- Review the business’s historical sales to identify any areas where retrospective sales taxes may be due.
- Review and identify reporting processes in place and where necessary consider implementing software solutions to ensure local level compliance.
- Consult with an adviser on filing and reporting requirements, if required, to develop a timely place for the filing of sales tax returns.