The Sales Tax Challenges of Non-U.S. businesses in a Post-Wayfair World
Part II: What foreign sellers need to know about compliance and enforcement of sales tax in the US?
In Part I, we pointed out that the US is very attractive market for non-US businesses selling online into the US. However, we also pointed out that there are a number of questions and issues around non-US businesses selling into the US which remain unanswered or at least need clarification as a result of the Wayfair decision to repeal the rule that only companies with physical presence in the US are subject to sales and use tax obligations. Because other forms of presence, e.g., economic presence, will become a part of state nexus statutes, that means new issues have arisen that could mean new planning, compliance and administrative headaches for companies in every state in which they plan to do business. We raised some key issues and suggested some next steps in addressing these issues for non-US businesses in each state:
- Understanding the issues that apply to all businesses.
- Understanding the issues that are unique to non-US businesses
- Understanding the current and changing compliance rules in 50 states, and
- Finding the expertise, tools and research support needed to effectively and efficiently apply those rules to each company’s particular circumstances in arriving at the best solution for each company in each state.
[Read more if you want to learn more details on some of the key compliance questions and answers that are unique to Non-US companies doing business remotely in the US
Question 1: Does the foreign commerce clause in the US constitution allow states to subject foreign companies to the same nexus standard as US domestic companies?
Answer: Believe it or not, there may be serious constitutional issues raised over whether the states may tax foreign taxpayers at all under the Wayfair holding. It centers not around the regulation of interstate domestic commerce in the US but around the regulation of foreign commerce under both the foreign commerce and import-export clauses of the federal constitution. Stay tuned; however, the rest of the questions below assume that the regulation of non-US sellers under Wayfair is constitutional.
Question 2: What are the sales tax effects if a non-US seller sales goods through a US subsidiary?
Answer: Non-US sellers selling goods and services through a US subsidiary through, for example, a distribution center, may have to collect sales tax not just in states where the subsidiary is located but to every state where the Sub does business—bill to or ship to–over a certain amount of economic activity.
Example: South Dakota could have enforcement jurisdiction over a Mexico City, Mexico resident’s purchase of goods from a Canadian retailer for delivery to South Dakota and the Canadian retailer would be obligated to monitor its sales for each such occurrence.
Question 3: What are the sales tax effects if a non-US seller sales goods and services directly to customers?
Answer: Non-US seller selling goods and services directly to customers will either collect and remit taxes or risk state-instigated judicial liens that could affect, for example, subsequent m&A activity
Question 4: What are the sales tax effect if a non-US seller sales goods on a marketplace platform?
Answer: Non-US seller selling goods on a marketplace platform may find it challenging to know where their sale tax obligations end and the marketplace entity begins.
Question 5: What are the relevant differences between (1) Nexus v Permanent Establishment….
Answer: Because non-US businesses may be more familiar with the compliance consequences of a permanent establishment under a tax treaty, rather than the more open-ended state nexus principles, it is useful to compare the main differences:
|Key Elements||State Nexus||Permanent Establishment|
|Level of Presence||No longer dependent on physical presence alone||Generally, there is much more of an emphasis on physical presence and permanence|
|Focus of Activities||Varying degrees of business and economic activity defined by each state||Specifically enumerated activities generally centered around fixed establishments|
|Tax Treaties||States do not fall under the protection of tax treaties||Permanent establishments are defined and generally controlled by tax treaties.|
… and (2) Sales and Use Tax v. Value-Added Tax?
Answer: Because non-US businesses may be more familiar with the compliance aspects of the value-added tax (VAT) rather than the more open-ended state sales tax, it is useful to compare them:
|Scope||Value Added Tax (VAT)||Sales and Use Tax (SUT)|
|What levels of government is the tax imposed?||VAT generally charged at national level||SUT charged at state and local levels|
|What goods and services are taxed?||In general, all goods and services with exemptions, exclusions and lower rates||Primarily tangible personal property with exemptions and exceptions, as well as selected services|
|What levels of supply chain have payment responsibilities?||Every level in the supply chain with credits, etc.||Only on final consumption with exemptions for resale, manufacturing, etc. for supply chain intermediaries|
|Is there a uniform system of rules across jurisdictions?||EU VAT legislation is an example of a uniform set of rules; for other countries each has its own set of rules||No mandatory uniformity among states, but states may elect to adopt the streamlined sales tax agreement.|
Question 6: Would future federal legislation on state sales taxes affect US and non-US businesses differently?
Answer: Where state action involves foreign commerce, the Supreme Court in Japan Line held that the US must be able to speak with “one voice” in the regulation of that commerce. That should mean that internet commerce is global commerce and state laws must conform to the rules established by the US.
Question 7: Does an international seller have to form or create a U.S. entity to register for sales tax collection purposes? Is an EIN number needed to register? Is a U.S. bank account needed?
Answer: Although the seller does not have to form a US entity, there are nonetheless many rules with which foreign sellers would have to comply in each state, e.g., need for an EIN number and in some states a bank account in the US that could be subject to federal, state and judicial liens.
In order to track these rules in each state, you need the right tools. CCH SureTax – sales & use tax software you can trust