The US Supreme Court’s South Dakota v. Wayfair ruling has been described as the tax bombshell of the century. The trial paved the way for most US states to introduce sales tax on goods entering from outside the state, or even country. How did the decision come about? And what impact has the decision had on UK companies, multinationals, and marketplace traders selling to the US?
Until June 2018, no US state’s sales taxes applied to companies without an employee or physical presence, such as a store or warehouse, in that state. That meant distance sellers such as e-commerce traders were exempt from local sales taxes. And as there is no nationwide Value Added Tax (VAT) system in the USA, just state and local sales taxes, this meant international companies such as UK retailers without an office or employees in the US, had no taxable presence.
This fortunate state of affairs (for distance sellers and their buyers at least) held firm for many years. However, a number of states began to believe their Main Street (to use the popular American term for High Street) stores were losing sales against out-of-state distance sellers - and that they were missing out on an important potential source of revenue. From time to time they attempted to change US national law to force out-of-state retailers to require the payment of sales taxes in the state where the sale took place; but with no luck. Most famously, a 1992 decision by the U.S. Supreme Court, Quill v. North Dakota, found that a catalogue company couldn't be required to collect state sales taxes unless it had a physical presence in the state.
But with the growth of e-commerce, the strength of the argument that taxes should be imposed on sales from out-of-state sellers began to grow. Strictly speaking the answer should perhaps have lied in the imposition of America’s Use, as opposed to Sales, tax. Use Tax in America is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax applies to purchases made outside the taxing jurisdiction but used within a state. But it’s a tricky tax to rely on as it depends on buyers self-declaring such items – something people seem not over eager to do! Colorado did indeed seek to impose a tax on buyers based on this law, but a federal court found it Unconstitutional.
Amazon in particular became the target of many state’s wrath as e-commerce grew and Main Street suffered. Unilaterally a number of states introduced what became known as Amazon Laws. These were based on a work-around of the existing law of ‘nexus’ – in which a link between the retailer and the state had to be established in order for it to be taxed. Retailers were now deemed to have a physical presence in states where agents solicit business on their behalf. Under the so called ‘click-through nexus statute’, a retailer without traditional physical presence in a state could be considered to have a presence if it does business with a company that has physical presence in that state and has a website that directs online users to the retailer’s website in exchange for compensation. For example, if a business has physical presence in all fifty states and its website has a click on referral for a retailer, that retailer could be considered to have physical presence in each such state and be required to collect sales or use taxes on all of its online sales in the states that have such a law.
New York was the first state to adopt the click-through nexus approach in 2008. Other states to follow on swiftly included Arkansas, California, Connecticut, Illinois, North Carolina, Rhode Island and Vermont. Amazon and others didn’t give in without a fight, however. For example, in some states they simply cut all ties and links – sometimes very long-established ones - with physical business connected to them. But with the tide of public opinion and state legislation turning, Amazon eventually began to capitulate.
Amazon entered into settlements with various states, including California, Pennsylvania and New Jersey, in which it agreed to collect sales or use taxes in return for these states foregoing uncollected taxes on past sales. To give one typical, but fateful, example, on February 1, 2017, Amazon agreed to start voluntarily adhering to South Dakota’s sales tax remittance laws.
This was a decision that encouraged State Governor Dennis Daugaard to further push the issue at national level, to fight for the right to introduce a full State Online tax. "Amazon is a leading online merchant, growing every year by double digits. Amazon’s decision to collect sales tax doesn’t solve the sales tax issue for online purchases, but it’s a big step in the right direction," Daugaard said.
Amazon Laws were a partial solution, but many states felt a nationwide Federal ruling was necessary. The debate over whether all out-of-state sellers should be responsible for collecting sales taxes in every state they sell in, regardless of whether other physical retailers are linked to the site or not, was some time going through the US Supreme Court. Finally, on June 21 2018, the Court issued its much anticipated ruling in the case of South Dakota v Wayfair (a US nationwide online home furnishings store), overturning previous decisions and declaring remote sellers, whether from a different US state or an entirely different country such as the UK, must pay state sales taxes if their sales pass a state’s tax threshold.
Now an economic presence – ie sales over a certain value or volume rather than a physical presence - became enough to trigger what the US terms ‘nexus’: a strong enough presence to trigger sales taxes. And the new law applied not only to out-of-state sellers, but overseas companies as well. And perhaps the real kicker is that, though the law is aimed at larger companies who achieve sales of over $100,000, most states are treating online marketplace organisations – such as eBay and Amazon - as the facilitator, rather than the individual marketplace traders that use it. This means all Amazon and eBay sales – not those of a particular trader using the marketplace – qualify as over the state tax threshold and therefore liable for sales tax.
When the verdict of S Dakota v Wayfair was announced, the respected analysts Deloitte warned: ‘The aggressive application of state nexus standards may surprise foreign companies that may be under the impression that the existence of a tax treaty between their home jurisdiction and the United States avoids state income tax.’
So, a year on, has any UK company fallen foul of the new ruling, and are UK sellers being impacted by the new taxes? Let’s remain with the state that let the cat out of the bag. It was South Dakota who pushed for a change in the law to ensure sales tax should now apply to distance sales and e-commerce, as well as physical sales inside the state. The exact legislation in South Dakota is that all companies achieving sales of over $100,000, and/or 200 transactions, inside a year, are liable for sales tax. Some large UK companies have probably reached that threshold, but - so far - no case has been bought against any British company.
It’s hard to understand how a double whammy of business rates and a new tax of 1% on online sales – if this is the final route chosen by the Chancellor – helps solve the original problem, that the British High Street is nearing collapse.
But that might not remain the situation for long. Says US Tax & Financial Services, an American company with London offices: 'Where we are mostly seeing these new rules affect our client base is with online retailers based outside the US. We often receive queries from businesses that manufacture and store products entirely outside of the US, shipping to US customers directly. Whereas previously this type of arrangement may not have met the threshold under the old physical nexus rules, that no longer affords them the same protection in a post-Wayfair environment. Businesses that currently sell into the US market, therefore, are recommended to make plans at once to begin collecting and paying sales taxes in the states into which they now sell.’
Ironically, here in the UK, it is on the little guy, the small marketplace retailer exporting to the US, that the new legislation has had the most impact – not large multinationals. This is because – on the back of S Dakota v Wayfair - most states have started altering the law in order to largely automate sales taxes on all marketplace traders selling through organisations, such as Amazon and eBay, that are large enough to meet their tax thresholds. Known as Marketplace Facilitator legislation, these laws shifted the sales and use tax collection and remittance obligations from the third-party seller themselves to the marketplace facilitator – using a simplified tax administration system that blanket collects taxes on most sales. On-line and other remote, out-of-state, sellers must collect state and local sales and use taxes in those states where the seller does not have a physical presence but where they sell and deliver their products and services. Amazon has already started charging taxes on all sales in most states. Sticking with our example state of South Dakota, Amazon has added sales tax to transactions there for some time; while eBay started collecting online sales tax on applicable sales in South Dakota on the 1st of July 2019; as part of its second wave of state tax introductions. eBay now automatically collects sales tax for applicable orders. It says that there are no opt-outs for selling items to the states that it is collecting tax for, or out of.
What does that mean for UK-based eBay and Amazon sellers? Well, UK marketplace sellers are now fully exposed to the new legislation, just the same as a US company based in another state. A sales tax is automatically imposed in all US states that have enacted the legislation – which is now all but two of the 50 US states. Traders do not need to take any physical action themselves. It’s a painless experience in that way – but it does mean US buyers are now paying more on these products. eBay, for example, collects the online sales tax on the sellers’ behalf for the affected states; and it says that are no extra charges or fees for this service. Currently the state sales tax is 4.5% in South Dakota, which would mean an extra $4.50 on an $100 item. Add any relevant local tax rates and the average rate is around 6.5% in total.
Larger overseas organisations selling over the threshold amount don’t seem to have been in a hurry to start paying the new taxes. Are they relying on states finding it impractical to pursue them for any money owed? And if so, is that a realistic plan; or could it prove dangerous in the longer term?
According to tax advisors Ernst and Young, ‘although enforcement by the states against non-US companies that do not have any contact with the US may be problematic in the short-term, if a state determines there was a tax collection responsibility and the non-US company failed to comply, since the non-US company did not file a return, the statute of limitations for assessment and enforcement will remain open indefinitely. That means there is no limit to the amount of time in which owed taxes can be pursued before the case must be closed. Moreover, unlike for US federal income taxes, most states impose broad successor liability laws that are applicable to purchasers of the assets of a business that failed to collect sales.’
It also means, that if a UK company decides in the future it wants to establish a store or warehouse in a particular state, it will have to pay all the outstanding taxes before setting up business. Basically, for large UK retailers and manufacturers with significant sales in specific states, S Dakota v Wayfair is a trap still waiting to be sprung.
And if you have read through all this thinking you are glad there are no extra taxes imposed on internet sales here in the UK, think again. It's an argument set to be revisited on this side of the pond following the ‘Amazon Tax’ proposal introduced by former Chancellor Philip Hammond.
Five states do not have state-wide sales taxes:
Of these, Alaska allows localities to charge local sales taxes. The rules for the other states are below:
|State||$ threshold pa||Transaction threshold pa||State tax %||Other requirements|
|Arizona||$200,000||TBC||5.6%||threshold reduces to $150,000 in 2020 and $100,000 in 2021. To be introduced October 1 2019.|
|Georgia||$250,000||OR 200||4%||Threshold reduces to $100,000 in January 2020|
|Kansas||6.5%||No minimum transaction threshold. To be introduced October 1 2019.|
|Louisiana||$100,000||OR 200||4.45%||To be introduced before July 1 2020|
|Massachusetts||$100,000||6.25||To be introduced October 1 2019|
|New Jersey||$100,000||OR 200||6.63%|
|New York||$300,000||AND 100||4%||No effective introduction period has been confirmed|
|North Carolina||$100,000||OR 200||4.75%|
|Ohio||$100,000||OR 200||5.75%||Ohio’s new law retains a provision that excludes small remote sellers – defined as a remote seller whose gross annual receipts from remote sales in the United States (including affiliate sales) don’t exceed $1 million for the preceding calendar year. Ohio Rev. Code Ann. §§ 5741.01(S) and 5741.17(c)|
|Oklahoma||$100,000||4.5%||To be introduced November 1 2019|
|Rhode Island||$100,000||OR 200||7%|
|South Dakota||$100,000||OR 200||4.5%|
|Texas||$500,000||6.25%||To be introduced October 1 2019|
|Washington DC||$100,000||OR 200||6%|
|West Virginia||$100,000||OR 200||6%|