U.S. Sales Tax: The implications of the Wayfair decision for non-U.S. companies

 

Set aside what you know about bilateral tax treaties, and the rules of Permanent Establishment, which don’t apply to U.S. sales and use tax. 45 of the 50 U.S. states, plus the District of Columbia, impose a state-level sales and use tax, and view all sellers the same: If the seller has sufficient contact (“nexus”) with the state, the seller is subject to the state’s sales and use tax laws, regardless of where the seller is based or legally domiciled. Prior to the South Dakota v. Wayfair, Inc. (“Wayfair”) ruling, a state could not impose its sales and use tax laws on a seller who had no in-state physical presence. Following the Wayfair ruling, a seller can now be deemed to have sales tax nexus even if the seller has no in-state physical presence.

 

Sales Tax: A not-so-simple tax

 

There are similarities among state sales tax rules as they apply to taxation of transactions. For instance, all states which impose a sales tax will tax the sale, and almost always the lease, of “tangible personal property”. A number of states also tax the provision of certain services and/or digital property. The state that has jurisdiction to tax a sale is generally the state where title to and/or possession of a good passes to the buyer; and for the provision of a taxable service, is typically the state where the buyer “receives the benefit” of the taxable service.

 

Sellers are expected to apply the appropriate tax rate to the sales invoice, which, in many states, can involve both a state and a municipal (“local”) tax rate. While automation via sales tax solution software can ease the burden of sales tax compliance and reduce errors, the complexity of a seller’s product and/or the state’s laws often leave room for error. Accordingly, U.S. sellers are typically unenthusiastic about acquiring sales tax nexus in additional states.