TT308: US Sales tax, South Dakota v. Wayfair Inc – what is this and why does it matter to you?

November 22, 2019

I recently attended an excellent presentation by William Finnecy, a CPA from Pennsylvania, USA.  We were attending a conference of our international association, International Practice Group in Bratislava, Slovakia.  I felt it would be useful to share this.

 

Sales tax is charged at a state level on goods and services in the United States of America.  The most contact many Brits will have has with this tax is going on holiday and experiencing the surprise in finding out the price quoted on the shelf is more at the checkout.  Else, we have travelled over a state border to an outlet mall to get cheaper goods!  Sales tax acts like our VAT, but only on the end user of the goods or services and is not charged/reclaimed in the supply chain.  45 of the 50 States have a sales tax and complex set of rules and exemptions apply from state to state.  As there are many combinations of state and local jurisdictions, it has been described to me as being potentially tens of thousands of different effective rates to consider.

 

However, for many years the USA has followed a system whereby the sales tax was only collected and paid by vendors with a physical presence in that state.  This was felt by many to be unfair as it gave internet retailers a competitive advantage.  With no physical presence they could avoid the sales tax.  In 2013 the law evolved to allow such vendors to be required by states to collect sales tax.  This received support from some online retailers as they acknowledged that it is unfair to give them such an advantage (and presumably felt they had to  take this on, else they would be considered to be undermining the high-street retailers).  But it was also resisted by some parties as it was felt far too complex for most vendors to cope with the complexity of the rules.  Additionally, previous rulings had preserved the status quo.  Matters evolved with states acting unilaterally until a test case was taken.  In this case in the US Supreme Court, South Dakota v. Wayfair Inc., the physical presence rule was determined as unsound in the modern internet shopping age.

 

But this case has reach far beyond the traditional image of internet and online sales.  It will impact on all entities selling goods and services into the US.

Generally, states are following the South Dakota thresholds of sales greater than $100,000 or 200 or more transactions in that state to trigger the need to register and collect sales tax.  Some states are reconsidering and removing the transactions thresholds.  States continue to apply the physical presence and the aforementioned test in determining the need to collect sales tax.  Notable exceptions for economic thresholds are:

  • $500,000 in total sales in state (California, Tennessee and Texas)
  • $500,000 in total sales in state and 100 transactions (Massachusetts)
  • $250,000 in total sales in state (Alabama, Connecticut, Mississippi)
  • $300,000 in total sales in state and 100 transactions (New York)
  • $10,000 in total sales in state (Oklahoma and Pennsylvania)

 

Market Place Facilitator laws have also been introduced to regulate online consolidators such as Amazon.

 

It should be made clear that this is an evolving issue and all businesses selling to the USA need to take updated and regular advice on the subject.

 

As this is such a complex area, Barnes Roffe cannot provide advice directly, but we can introduce you to our US colleagues who can certainly advise you in this highly specialst area.  Please contact your Barnes Roffe partner if you have any questions.

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