Implications of the Wayfair Case for Companies with U.S. Customers
Historically, companies that make sales of goods or taxable services to U.S. customers were only required to collect state and local sales taxes in jurisdictions in which they had a physical presence (eg. store, warehouse, office), either directly or through an agent.
A recent ruling dealing with sales tax from online retailers appears to disregard this well-established physical presence precedent. Based on the U.S. Supreme Court ruling on June 21, 2018 in a case between South Dakota V. Wayfair Inc., the courts upheld a South Dakota law which requires sellers of goods or services into South Dakota that exceeded minimum thresholds to collect state sales tax at the time of purchase even if they lack a physical presence in the state. In South Dakota, this minimum threshold is if the seller delivers more than $100,000 of good or services into the state or engages in 200 or more transactions with in state-buyers in a year.
As a result of this significant ruling, companies selling to U.S. customers may have to contend with potential collection and filing responsibilities in states with laws similar to those of South Dakota. Currently 21 states have similar legislation already in place and many will look to begin to enforce these laws after the Wayfair judgement. Other states are looking to enact similar legislation.
If your company has U.S. sales activity, careful consideration should be made in order to assess the impact of this ruling on your business. A detailed analysis should be done of your U.S. sales activity, your customers, and the states affected. Where your customers operate in multiple jurisdictions, you may be faced with an added complexity of whether sales tax is required to be spread across these jurisdictions (for example, in the case of a license to be used across the customers locations).
Preliminary consideration should be given to whether your product/service is subject to sales tax at all. Many states levy sales tax on products only, and not services. However, there are state-specific exceptions to this rule, especially in the area of software and information technology services. Also consider state-specific exemptions that may be applicable (for example, for sales of goods or services for use in manufacturing or industrial processing). However, note that even though exemption criteria may be met, registration for sales tax may still be required.
There is speculation on whether the Canadian government will review its own rules regarding sales tax for online realtors now that the U.S. Supreme Court has set this precedent. The province of Quebec has as of March 27th, 2018 already proposed a 9.975% sales tax on digital platforms (out-of-province vendors), a model which other provinces and the federal government may look to adopt in the future. We will keep you posted on the impact of these changes closer to home.
The rules and ramifications of the Wayfair case are pervasive and complex. Professional advice should be sought to determine applicability on a case-by-case basis. For more information, contact us.