Why Foreign Sellers Can't Ignore The Rising Tide Of U.S. Sales Tax Obligations

By Charles Maniace, Sovos

June marked a new era in U.S. taxation, particularly for e-commerce businesses and remote sellers. That’s when the U.S. Supreme Court overturned its long-standing Quill decision, ruling in the South Dakota v. Wayfair case that the state could collect sales tax from out-of-state and out-of-country vendors for purchases made by in-state residents. This decision opened the floodgates, as now more than 20 states have begun either enforcing or enacting laws or rules that require taxes to be collected from remote sellers. And there’s no doubt even more states will follow.

The rate at which states are issuing guidance is unprecedented. While this regulatory wave is dizzying for domestic sellers, it’s even more challenging for foreign outbound sellers who have limited U.S. operations and far fewer insights into American tax policy.

Communities Striving To Collect What They’re Owed

New state-by-state requirements are similar to rules cropping up in Latin America, Europe and other parts of the world, which compel e-service providers to register to collect and remit value-added tax (VAT) even if they have no other connection to a country other than the fact that their customer happens to reside there. All of these tax changes share one common goal: closing significant local tax gaps.

In 2017 alone, the U.S. Government Accountability Office estimated that states had lost more than $13 billion in taxes they could not collect. These gaps have gotten wider over the years, since Quill established physical presence in a state as a foundation for taxability. In the South Dakota v. Wayfair decision, Justice Anthony Kennedy wrote that the “internet's prevalence and power have changed the dynamics of the national economy," noting when Quill was decided in 1992, revenue for mail order products were around $180 billion. Fast forward to 2017, when Americans spent an estimated $453.5 billion in e-commerce transactions.

Foreign Sellers: Pay Close Attention

Retailers based outside of the U.S. need to pay close attention to how these sales tax requirements are evolving and quickly develop a game plan for compliance.

With the Supreme Court's ruling, states can now articulate that they have a reasonable standard to establish whether a business has substantial nexus requiring it to pay sales tax. The South Dakota standard, for example, is 200 or more separate transactions or more than $100,000 in sales in the prior or current calendar year. Many other states are adopting that standard, but not all, which makes it imperative for foreign companies to know their exact exposure.

Tax Automation In A Post Quill World: How To Plot A Course Of Action

Second only to China’s e-commerce market, these new regulations aren’t likely to deter foreign retailers from selling to American consumers. Therefore, here are a few steps e-retailers should take to ensure compliance:

• Stay Alert to New State Sales Tax Filing Rules and Requirements – States are devising rules and regulations imposing economic nexus standards and continually updating and modifying their returns and filing methods. These changes sometimes occur close to filing deadlines, with little advance notice to taxpayers.

• Be Informed of Sales Tax Filing Options – A handful of states have designed simplified filing regimes. For example, simplified mechanisms in Alabama and Louisiana allow sellers to avoid tracking local rates and effectuating local filing. These options must be selected at the time of registration to ensure eligibility.

• Populate Sales Tax Forms Accurately – Populating a sales tax return that accurately reports total sales, taxable sales and exempt sales is important but not necessarily sufficient to prevent penalty assessments. While most of the Streamlined Sales Tax Member States allow taxpayers to use a “simplified electronic return,” the trend toward simplification is not universal. Some states have relatively complex filing requirements, mandating taxpayers to not only report their numbers exactly right but also requiring granular delineation of exemption types. For example, the Arizona TPT-EZ, despite its name, is anything by easy.

• Consider the Risks - Many non-U.S. sellers may feel they are immune from liability based exclusively on the fact they are located overseas. But if they want to expand geographically, sellers may eventually find themselves in physical locations where they’ve avoided taxes in the past. Or, if sellers have assets located in states where they’ve failed to comply, those assets could be seized for noncompliance. For example, while you may not have physical assets in a state, you may have intangible assets such as accounts receivable from your customers. While no state has tried it just yet, it’s possible that they could act to seize customer payments and extract their tax before the money gets to you. There’s also the reputational risk of being perceived as a tax cheat, such as Apple’s recent experience with Ireland.

The Role Of Software And Automation In Tax Compliance

In addressing compliance, sellers – both foreign and domestic – may experience a number of missteps, whether it's trying to maintain rates and rules databases themselves, stretching an existing solution beyond its capability, or selecting a vendor that is not the right fit.

Staying current on specific rules in every U.S. state may seem like an insurmountable challenge, but tax automation software can ease the burden significantly. The South Dakota v. Wayfair ruling even mentions the importance of software and the availability of reliable and affordable solutions on the market today. This ruling will likely drive further adoption of software, particularly among smaller businesses that have largely flown under the radar until now.

When considering tax automation software, global retailers should ask several key questions:

• Is the solution sound? – Is it from a reputable company, with processes and procedures designed to keep up-to-date with the pace and rate of regulatory change?

• Does the solution meet my requirements today? - Will it support the states that collect taxes now, with rate and rule content that addresses the items you sell and the ways you sell?

• Can the solution scale to meet my requirements in the future? - In this new era of modern tax, finding a solution that meets your requirements today as well as tomorrow is critical. If your organization has a minimal nexus profile today, will the solution be able to adapt if your requirements are somewhat expanded in a few months, then even further expanded, possibly going national shortly thereafter.

• Will the solution assist with other accounting and finance functions? – Can it support all the downstream requirements, such as calculating and filing taxes, and exceptions and certification management?

Change in sales tax obligations in the U.S. is only just beginning. Thanks to this summer’s Supreme Court ruling, more states will be empowered to bridge tax gaps by ensuring all sales are properly taxed, even if the seller is located outside of the state or the country. Keeping up with these requirements and adopting flexible tax automation solutions are the best ways businesses can work to minimize their risk, maintain their reputation and continue to grow their global sales.

About The Author

An attorney by trade with more than 15 years spent in tax and regulatory automation, Charles Maniace leads Sovos’ team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps clients continually complaint. He is a well-known speaker on a variety of topics, including “The Taxation of High-Tech Transactions,” “The Taxation of Remote Commerce,” “The Regulatory Implications of Brexit,” “The Rise of E-Audits,” “Form 1042-S Best Practices” and “Penalty Abatement Practices for Information Returns.”