Moore Stephens

The Wayfair Decision : US sales and use tax


On June 21, the U.S. Supreme Court reached a decision in the case South Dakota v. Wayfair, Inc., which may have an impact on U.S. sales and use tax for Canadian companies selling in the United States, whether these sales physically take place within the US or electronically (online).

Before the Wayfair Decision

For over 25 years, the requirement to register for sales tax in a state was based on the seller’s physical presence. Effectively, this criterion has been well-established since the Quill Corp vs. North Dakota decision , as a seller or retailer could only be required to register to collect sales tax if it had a certain level of physical presence within the state in question, such as the presence of employees, equipment, inventory, or a business establishment.

Today, the way we do business has changed with the e-commerce era. Many out-of-state sellers make significant sales of products through theirs websites or online marketplace and distribute them in many states without having any physical presence. Many states and retailers were complaining about this criterion was becoming increasingly outdated and inconsistent with new economic realities.

Therefore, with the goal of recovering its tax loss, South Dakota enacted a law in 2016 going directly against the standard of a physical presence from the Quill decision. This new law states that any seller exceeding US$100,000 in gross sales or over 200 transactions in the state, must register and collect sales tax, whether or not the criterion of a physical presence in the state is met.

The Supreme Court’s Decision

Many retailers, including the e-commerce website Wayfair, contested the constitutional validity of this new legislation all the way to the U.S. Supreme Court. In its decision last June, the Supreme Court determined that the criterion of a physical presence that had been in place since Quill decision was “unsatisfying and incorrect,” thereby confirming the constitutional validity of the new South Dakota law.

Impacts and changes to expect for your company

Following the Wayfair v. South Dakota decision, the criterion of physical presence has been replaced by an economic nexus for the purposes of sales tax in South Dakota. To date, nearly twenty states have followed and modified their laws. Some are already in effect as of the publication of the decision, while others will enter into effect in late 2018 or early 2019. Many other states could follow this trend.

This US Supreme Court decision may have significant repercussions beyond US borders. Many Canadian entities selling in the United States with no physical presence in the country should expect to review their Nexus analysis regarding sales tax and potentially register with new states.

If you would like to know more about how your business may be impacted, contact our tax professional.

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