On June 21, the U.S. Supreme Court issued a decision, South Dakota v. Wayfair Inc. will have a potential impact on U.S. sales taxes for Canadian companies making sales in the U.S., whether these are made physically on U.S. territory or electronically (internet).
Before the Wayfair decision
For more than twenty-five years, the minimum level of activity required in the United States for sales tax liability has been that of the seller’s physical presence in a given state. In fact, this criterion has been well established since Quill Corp vs. North Dakota: a seller or retailer could only be subject to registering for and collecting state sales tax if it had a certain level of physical presence in the state in question, such as the presence of employees in the field or equipment, inventory or place of business.
However, the business models of many entrepreneurs have changed dramatically with the advent of e-commerce. Many companies based outside a given state sell their products via a web platform and distribute them in several states, while having no physical presence. Many governments and companies deplored the fact that this criterion was becoming increasingly outdated and out of step with new economic realities.
So, in an effort to recover its share of the shortfall in its tax base, South Dakota passed a law in 2016 that runs directly counter to the Quill decision’s physical presence standard. Under this new law, any seller making more than $100,000 USD in gross sales or more than 200 transactions on its territory must register and collect sales tax, whether or not the criterion of physical presence in the state is met.
Supreme Court decision
Several retailers, including e-commerce company Wayfair, have challenged the constitutionality of this new legislation all the way to the U.S. Supreme Court. In its June ruling, the Supreme Court found that the physical presence test that had prevailed since the Quill decision was “unsatisfactory and incorrect”, thereby upholding the constitutionality of South Dakota’s new law.
Impacts and changes for your company
Following Wayfair v. In South Dakota, the physical presence criterion is replaced by the economic presence criterion for sales tax purposes. To date, nearly twenty American states have followed suit and adapted their laws. Some are already applicable since the publication of the judgment, and others will come into force at the end of 2018 or early 2019. Several other states could follow suit.
This decision by the U.S. Supreme Court is likely to have major repercussions beyond American borders. Many Canadian entities making sales in the U.S. with no physical presence in the territory should therefore expect to review their sales tax nexus analysis and possibly register with new states.
The Demers Beaulne team can help you identify the extent to which the above considerations could have an impact on your business.
Should you require further information, please do not hesitate to contact our tax department.
