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:
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:
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.”