September 2, 2020
On June 21, 2018 US Supreme Court released its decision in South Dakota v. Wayfair, Inc. case in which the Court ruled that South Dakota may charge sales tax from distance sellers making sales to South Dakota even if these distance sellers doesn’t have a physical presence in the state, but meets one of the following criteria (the so called “economic nexus”):
South Dakota v. Wayfair, Inc. decision overturned Quill Corp. v. North Dakota decision, which ruled that states are not allowed to collect sales tax from distance sellers unless those sellers have a physical presence in a taxing state.
Since the Court ruling in South Dakota v. Wayfair, Inc. case, 46 US states has enacted economic nexus laws. Most of them modeled they economic nexus laws remarkably similar to South Dakota economic nexus laws as South Dakota was awarded with a positive ruling in the Court.
Once economic nexus laws were enacted, states have faced two major challenges.
The first one was the usual business practices of distance sellers. Prior to Wayfair ruling, distance sellers were used to collect sales taxes in their home states or countries as long as they didn’t have any physical presence in a particular state, however, Wayfair decision changed this overnight and this was the new world to get used to for distance sellers.
The second challenge US states has faced was that it became extremely difficult to identify distance sellers that were meeting economic nexus thresholds but dodged their obligation to register for sales tax. Originally, States had been hoping for a voluntary sales tax registration from distance sellers, however, since economic nexus laws have been in effect for two years now and the results are not as good as the states had hoped, they will start to focusing more towards the distance sellers that are dodging their obligations to register for sales tax. Richard Cram, director of the Multistate Tax Commission’s National Nexus Program, predicts that, as states don’t have enough manpower and resources to identify independently all non-complying distance sellers, most probably there’ll be new businesses that will market themselves to state tax departments as the ones who are capable to identify non-filing distance sellers.
From our own expertise, we believe that States will also force financial institutions to share transactional information about their US customers’ payments made to non-resident distance sellers, this will empower States to collect billing descriptor information and identify non-compliant distance sellers.
It is worth to mention that distance sellers also faced some challenges, to be precise – distance sellers’ awareness about sales tax collection obligation and compliance costs. They argue that it is states’ obligation to resolve these issues, however, little has been done. There is a mechanism in US called Streamlined Sales Tax which is similar to MOSS in Europe. There were 24 US states that joined SST prior to South Dakota v. Wayfair, Inc. ruling, but none of the new states has joined SST since the ruling.
SST is the only example of a coordinated consolidated look at what it costs for distance sellers to collect sales tax. Distance sellers believes that it could significantly reduce sales tax compliance costs if all 46 states, which has implemented economic nexus laws, would join SST.
Therefore, it would remarkably increase distance seller’s awareness about sales tax collection obligation, if, let’s say, Alabama’s state tax department would inform the distance seller, which is registered for sales tax in Alabama, that there may be an obligation for you to be collecting sales tax in, let’s say, Alaska.
Distance sellers also demands to set thresholds at some sort of uniform rate and to abolish transactional thresholds. Abolishment of transactional thresholds would enormously simplify things to distance sellers as now it is extremely easy for a small distance seller to get into transactional trouble for selling, let’s say, $1 worth digital products across the states.
What to expect further? Richard Cram presumes that states are going to include more digital products or electronic services as a taxable one as the economy moves toward a more service-based economy, however, in the same time, states have to reduce sales tax compliance costs and increase seller’s awareness about their sales tax collection obligations.