VIEWpoint Issue 2 | 2018
Tax Cuts and Jobs Act – Highlights of What is Ahead for You...
VIEWpoint Issue 3 | 2017
Ask the Advisors – Engaging a Third-Party to Conduct Sell-Side...
Key Tax-Planning Strategies Post Tax Reform
GILTI – Costly Impact for Non-C Corporate Shareholders
On June 21, 2018, in a highly anticipated decision, the U.S. Supreme Court ruled companies do not have to have a physical presence in a state in order to be required to register for and collect sales taxes. This decision may have far-reaching implications on remote and online sellers.
The sales tax regime in the United States is infamous for its complexity. Each state and many municipalities have their own rates and sets of rules. Companies selling into multiple states found it difficult to understand their obligations and equally difficult to comply. For years, these rules were based on a standard of physical presence. Essentially, companies had an obligation to collect and remit sales taxes when they had a physical presence in a state. This standard offered online sellers an advantage since their goods and services could be sold into states where they had no physical presence free of sales taxes. This was particularly advantageous for Europeans who were able to avoid both VAT and U.S. sales tax.
The State of South Dakota passed legislation requiring sellers selling tangible personal property, products transferred electronically, or services for delivery into the state, who do not have a physical presence in the state, to remit sales tax. This legislation was challenged, ultimately reaching the U.S. Supreme Court.
In a slim five to four decision, the court backed the State of South Dakota, thereby opening the door for more states to follow suit with similar legislation. It should be noted however that, in reaching its decision, the court considered it important that South Dakota’s rules required a significant amount of activity, thereby implying de minimis activity might still be exempted.
The court also looked favorably on the South Dakota law because of its simplicity of rules and regulations, and ability for taxpayers to comply; it did not result in an undue burden to interstate commerce.
There are currently 31 states with laws taxing internet sales. This case will probably result in those states modifying their rules to conform with those of South Dakota and other states adopting similar laws.
Remote and online sellers will want to review their controls and procedures to prepare to comply with this trend. Foreign inbound sellers may need to consider adjusting their strategy of avoiding a physical presence in the United States just to avoid taxes. The Wayfair case, in conjunction with tax reform, presents a unique opportunity for businesses to review their inbound U.S. strategy. Moore Stephens Doeren Mayhew can assist you with this analysis. Contact them today.
This article is a reprint from Moore Stephens Doeren Mayhew’s GlobalVIEW.
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