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U.S. Sales Tax Nexus Expanded - What it Means for Foreign Sellers

Industries: International Business

Services: International Business, Tax

By: Jennifer Dowdy

Changes in legislation regarding sales and use tax jurisdiction expanded sales tax collection and reporting responsbilities for many companies.  These changes could have a significant impact on foreign remote sellers, as they may now be required to collect and remit state sales tax on their U.S. sales even when they have no physical presence in the U.S. 

Until 2018, only a ‘physical presence’ standard was used to determine sales tax nexus.  Nexus is the connection to or level of business activity in a state that is needed to enable a state to tax a business.  Under the physical presence nexus standard, companies that had a connection to a state via employees, inventory, or a physical location were deemed to have sales and use tax nexus and were required to collect and remit sales tax on sales of their goods into that state.  So if a company merely had sales into a state and no other activity or connection, it was not required to collect sales and use tax from its customers.  The Wayfair case changed all of that in June 2018 with the support of an ‘economic presence’ nexus standard. 

In its June 2018 Wayfair[1] decision, the U.S. Supreme Court overturned the physical presence standard set by National Bella Hess[2] (1967) and Quill\[3] (1992) and added a new ‘economic presence’ nexus standard for sales and use tax.  This new standard significantly lowered the threshold by which states can impose sales and use tax collection responsibilities on companies. 

Economic presence nexus is determined by the number or amount of sales to a state.  In the Wayfair decision, the U.S. Supreme Court upheld South Dakota’s statute that established a threshold of $100,000 of sales to customers in the state or 200 transactions per year as the amount of activity sufficient to establish sales tax nexus in South Dakota.  Importantly, the Wayfair decision did not establish South Dakota’s sales and transactions thresholds as the economic presence standard for all states, so states can choose their own thresholds for economic nexus.  Almost all states have adopted the economic nexus standard to date, and the thresholds range from $100,000 to $500,000 of sales, with most states asserting $100,000 and some also including a transaction threshold.

What precipitated this change in the nexus standard for sales tax?  The tremendous growth of remote and online sales in today’s economy has changed the way businesses and consumers do business and made the physical presence standard outdated.  Additionally, since the economic downturn in 2008, state budget deficits have increased and states are looking for additional sources of revenue.  Sales tax has historically been a significant source of state revenue, so states are looking for new ways to grow revenue through sales tax collections.  A couple of states have even adopted economic nexus as the standard for asserting income tax jurisdiction, and more could be on the horizon. 

This nexus standard could pose a huge administrative burden on foreign entities that have historically been exempt from state sales tax collection because they had no physical presence in the U.S.  Companies should talk to their tax advisors about their risk and exposure to sales tax liabilities.  

 

[1] South Dakota v. Wayfair, Inc. (June 21, 2018)

[2] National Bellas Hess v. Illinois Department of Revenue (1967)

[3] Quill v. North Dakota (1992)