Wayfair Ruling: Will Foreign Corporations be Required to Collect Sales Tax?

By Solomon Packer  |  July 13, 2018

The Supreme Court of the United States recently decided the South Dakota v. Wayfair, Inc. case, which holds that an out-of-state corporation can be required to collect sales tax on sales to consumers within a state if “substantial nexus” exists.  The Court overruled prior case law which required a “physical presence” in a state before a seller could be required to collect the state’s sales tax.  Under prior law physical presence was deemed to provide “substantial nexus.” 

The court held that the South Dakota law, which required a company to either sell $100,000 of goods or services to customers within South Dakota or have a minimum of 200 sales to customers within the state, comprises “substantial nexus” to South Dakota.  This nexus was considered sufficient based on both “the economic and virtual contacts” the remote seller had within South Dakota.

This court case explicitly distinguishes the concept of physical presence from the concept of substantial presence.  The case therefore opens the issue of whether an out-of-state entity will also be required to collect sales tax if such entity sells $100,000 of goods or services to South Dakota residents or has 200 or more transactions with persons or entities located in South Dakota. 

Can this case, which was decided under the Commerce Clause of the U.S. Constitution while discussing matters of interstate commerce, also have application to international commerce? For example, will a Canadian pharmacy selling consumer goods be required to collect South Dakota sales tax on “taxable” sales to South Dakota residents where the pharmacy has more than 200 transactions with residents of the South Dakota?  Or, will a French vineyard be required to collect a state sales tax on Internet sales to U.S. consumers?

It is accepted that such transactions would not cause the Canadian pharmacy or French vineyard to be subject to U.S. federal income tax since the pharmacy or winery, under provisions of the U.S. – Canada (France) Income Tax Treaty, does not have a “permanent establishment” within the United States.  However, the treaty is not applicable to state income or sales taxes.  Therefore, tax treaties generally would not preclude states from requiring corporations formed outside the U.S. from having to register and collect sales tax from consumers located within a specific state. 

Many foreign corporations have distributors and/or stores in the U.S., and such companies will probably not experience an adverse impact from this court ruling, but they might now have a duty to collect tax on Internet sales within the U.S.  Foreign companies selling heavy equipment to U.S. consumers from abroad might now have a responsibility to collect sales tax, and foreign companies specializing in Internet sales to U.S. consumers might now have a duty to collect state sales tax.

The full breadth of implications of this court case is not yet apparent.  It is probable that, as the court accepted the South Dakota legislation as being acceptable under the U.S. constitution’s Commerce Clause, other states will adopt similar minimum requirements for imposing the duty to collect state sales taxes.  The issue is further exacerbated as the rate of sales tax varies within the states and even counties and cities.  Ultimately, the U.S. Congress might adopt legislation providing a standard for the imposition of sales tax on sales by out-of-state and foreign persons to U.S. consumers.

About Solomon Packer

Solomon Packer

Solomon Packer, CPA, JD, LL.M., is a Senior Consultant at Marks Paneth LLP. He specializes in the area of international taxation. In this capacity, Mr. Packer advises foreign persons and corporations on how to do business in the US and, conversely, advises US corporations on how to conduct business overseas in order to effectively reduce their worldwide tax exposure. His areas of specialization include international mergers and acquisitions, tax issues related to foreign ownership of... READ MORE +

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