On , June 21st , 2018, in a dramatic decision, the U.S. Supreme Court ruled that American states can impose sales tax on internet purchases even where the retailer has no physical presence in the state.
In doing so, the Court overturned over 50 years of precedent in the form of two of its prior decisions which previously restricted states from imposing sales tax on retailers lacking a physical connection to the state.
The case, South Dakota vs. Wayfair, involved a challenge to that state’s sales tax law which imposes a sales tax obligation on online retailers or remote sellers with more than $100,000 of sales to consumers in the state or engagement in 200 or more transactions involving the delivery of goods or services into the state. None of the companies involved in the case: Wayfair, Overstock.com, and Newegg, had any physical presence in the state.
The milestone decision signals judicial recognition of e-commerce as falling within the purview of a state’s taxing jurisdiction and closes a loophole retailers with pure online presence previously enjoyed. The Court noted in its opinion that “each year the physical presence test has become further removed from economic reality.”
Retailers with online presence must be especially vigilant as to state sales tax laws. Moreover, given the outcome of the decision, states may move toward similar legislation where they have not done so already.
Turning to non-U.S. companies whose only activity in the U.S. is e-commerce, the decision does create new US tax liabilities and compliance issues. If the threshold for sales and use taxation is now based on factors such as number of transactions or e-commerce volume of inbound sales, the state’s laws as written do not per se preclude non-US vendors selling online from the obligation of sales tax compliance.
In this regard, it should also be noted that the American states are technically not parties to any US tax treaty. US treaties only cover US federal tax, not state taxes. For example, California, which imposes a global unitary standard, has case law sustaining this position. Hence all non-US vendors with e-commerce sales into the US states, should review their transactions and state tax laws for potential state tax sales tax compliance issues.
The Wayfair case sends a clear message that the U.S. Supreme Court moving toward standards that analyze economic connections to a given state and away from factors that hinge on physical presence in a state. Online businesses everywhere should review their activities for compliance with US state tax laws if they have US customers.
Magda Szabo, CPA, JD, LL.M.
Tax Partner
Janover LLC
Magda.Szabo@janoverllc.com