US – Challenges for Remote Vendors

Last week was six years since the U.S. The Supreme Court issued a landmark decision in the Wayfair case. This decision introduced the concept of the sales tax or use tax liability for out-of-state sellers when they reach a state-designated economic nexus. 

Introduction of the Economic Nexus

Before Wayfair, states were generally limited to requiring sales tax collection only from businesses with a physical presence. The Wayfair decision overturned this precedent, allowing states to require out-of-state sellers to collect and remit sales tax even if they don’t have a physical presence in the state, provided they exceed certain economic thresholds.

State laws define the economic nexus differently. Some states determine the economic nexus through the taxable turnover on a yearly basis, others through the turnover and number of taxable transactions, and there are other scenarios as well. 

The most relevant fact to keep in mind is that when the remote supplier reaches the economic nexus, defined by the state’s laws, where he has considerable sales, he is obliged to accommodate his business operations in that state per the state tax laws. The first obligation will be to register for the state sales tax. 

The State’s regulatory framework that triggers the mandatory registration of the remote vendors( independent sellers and digital platforms) is quite different from each other, which brings the compliance duties for out-of-state sellers that make supplies in various states even more challenging. 

Taxability of New Digital Products

Since the Wayfair ruling, the revenue administrations of different states have continuously worked on expanding the taxability network of different kinds of digital products or services that were already present or that were developed after the court ruling. 

Rhode Island introduced sales tax liability for the supplies of Software-as-a-Service (SaaS), infrastructure-as-a-service (IaaS), and platform-as-a-service (PaaS) when the proper conditions are met.

Marketplace – Deemed Supplier

States have introduced the statutory requirement for digital platforms to charge, collect, and remit sales tax to the respective revenue administration when the conditions are met. The Marketplace Facilitator rules were introduced to make compliance easier for SMEs from one end and from the other to guarantee a higher level of compliance and tax revenue for the state tax offices compared to the business model where each digital vendor will carry out solely this responsibility. 

When a marketplace does not collect tax, the seller can still be responsible for the tax. Some states permit that, through signed terms and conditions, the responsibility for charging, collecting, and remitting the sales tax shall remain at the expense of the remote vendor, and it will not, by regulatory default, be passed to the digital marketplace. 

The US sales tax regulatory framework for out-of-state sellers is very complicated and challenging. The regulations are fragmented, and there are different thresholds. The responsibilities of the marketplace facilitators are also unclear. In summary, having the proper information about the taxability of digital goods or services can be very tricky. 

Sales tax compliance in the US is quite different from country-based requirements that foreign providers of digital services encounter in their EU-based operations. In this regard, more attention, investments, and rightful service providers are needed to establish a fruitful tax compliance solution for cross-border operations.