On ecommerce and sales tax. Updates and webinar
Imagine you sell things (goods or services) online to US-based customers. Given the coronavirus, people are buying more on-line, and your business is booming. Are you required to collect sales tax and pay them to the various states your customers are located? And if so, what happens if you don’t?
Up until June 2018, the answer given by the U.S. Supreme Court was very clear: so long as you did not have a physical presence (office, employee, etc.) in a state, it was unconstitutional for a state to impose tax obligations on you.
But in June 2018, in the case of South Dakota vs. Wayfair, the Supreme Court overruled its previous rulings and allowed states to impose on remote businesses the obligation of charging customers sales if the remote business had an “economic nexus” with the state. The rational of the ruling was clear: given the tremendous growth of ecommerce, the “physical presence” no longer made sense, and in fact both (i) deprived states of much needed sales-tax revenue, and (ii) hurt local businesses located in the state.
Following the Supreme Court’s decision, a majority of states have imposed obligations on remote sellers to collect sales tax on transactions to customers in that state if “economic nexus” criteria are met. Where does that leave the remote seller? Answering that question requires addressing three questions:
Does the state impose a sales tax at all? While a handful of states do not have sales tax, practically all states do. All the populated states have sales tax.
Does the state impose sales tax on the good or service that the remote seller sells? Most states impose sales tax on the sale of “tangible goods”. To most of us, the word “tangible” means something you can touch. Thus, if the sale is of something physical that is shipped in the mail, it is a tangible good subject to sales tax. But how about digital goods that are downloaded? While clearly not physical, these goods are defined as “tangible” in many states. What about software as a service (SAAS), where nothing is downloaded at all and the service being offered involves simply allowing the customer to access a remote server? Again, some states such as Massachusetts, New York and Texas impose sales tax on SAAS, while others do not. It is a state by state analysis.
Does the seller meet the state’s “economic nexus” test? Once again, answering this requires a state by state inquiry. Most states that have implemented the “economic nexus” test look at two different annual tests: (i) the dollar value of the sales in the state, and (ii) the number of sales in the state. In many states, meeting the dollar value tests is sufficient to impose liability. In other states both tests must be met. In many states, the dollar value is $100,000, while in others it is as high as $500,000.
A remote seller who meets the above tests is required to formally register with the state, and collect/remit the sales taxes by law. Penalties and interest apply for underpayment. States typically have 2-3 years to audit sales tax returns, but there is often no statute of limitation where no return is filed.
To summarize, whether an on-line business has sales tax liability is no longer a question of physical presence in the state. Rather, two questions must be answered: (i) Does the on-line business sale a tangible product that is subject to sales tax, and (ii) Does the on-line business meet the economic nexus test in the various states.
Webinar - Sales tax issues for ecommerce companies around the world who sell to US-based customers.
This webinar is for ecommerce/on-line businesses around the world that sell to U.S. customers & their tax professionals
Date & Time: Thursday November 19.
9 am London, 10 am Paris/Germany, 11 am Israel, 5 pm Beijing, 6 pm Seoul/Tokyo, 8 pm Sydney