In June 2018, the Supreme Court of the United States ruled in favour of the state in South Dakota v. Wayfair, Inc. This ruling, now commonly referred to as “Wayfair”, addresses the circumstances driving tax liability for eCommerce retailers selling in to US States from outside the State in which the purchaser lives.
Historically in the US, 45 States have operated a local State sales tax which each have their own rules and operate independently of Federal taxes. The Supreme Court ruling has redefined the definition of what constitutes “nexus*” for sales in South Dakota and thereby closed a perceived tax loophole that benefitted out-of-State and international retailers/e-tailers selling goods in to a US state where they had no physical presence (compared to locally present retailers). In essence the ruling confirms physical presence is not required for state tax jurisdiction to apply and is not a requirement under the Commerce Clause of the US Constitution. Under this scheme, in 2018, State sales tax was only collected on around 50% of all eCommerce orders placed in the US.
*“Nexus” in this context of trade refers to the criteria that has to be met before State tax must be levied on a purchase and historically had a physical presence and/or revenue level threshold/s that triggered the State tax obligation. This definition is long standing and comes from rulings in 1967 and 1992, both of which have been redefined by South Dakota.
The Supreme Court ruling marks the move to a more general “economic nexus”, based on sales revenue and/or transaction volume in a State, rather than a physical presence. Prior to the Wayfair decision almost half of US states defined nexus in line with South Dakota. As a result it’s likely the change in definition will also flow through to other jurisdictions.
What’s interesting is that the Wayfair ruling does not create new taxes, it relates to when taxes are applicable and now clearly encompasses the obligations of out-of -Sate or ‘Remote Seller.
In 2018, the US Government Accountability Office (GAO) estimated uncollected eCommerce tax revenue to be worth up to US$13 billion.
So how can retailers/remote sellers calculate their liability?
The truth is it still varies State by State, At a glance, using South Dakota as the example, retail sales of more than US$100,000 or more than 200 sales a year to customers is the point at which you would need to be compliant. But that rule does not hold for all States.
The diversity of legislation between States can make this a tough task. Avalara maintains details of relevant state tax laws with which eCommerce retailers need to comply, though it’s clear that the majority of states who have enacted legislation in the wake of Wayfair are also following South Dakota’s lead in the detail. In the minority, it’s likely some states with a history of lenient sales tax laws will never pass a sales tax.
Many states are also considering imposing collection duties on marketplaces like Amazon, eBay and Etsy. Retailers operating on marketplaces should assess whether new laws entail changes to their tax rates or reporting.
For businesses now re-assessing their US tax liability it’s important to note that tax collection will not be retroactive where new legislation makes a retailer liable.
This year eCommerce is set to make up 10.9% of total US retail spending. Understandably, many retailers will be affected.
Most eCommerce platforms offer the ability to manage and import tax tables as part of their standard offering. Magento offers tax rules, while Salesforce B2C Commerce allows the import and manual setup of tax rates.
A growing number of online retailers are taking advantage of widespread tax apps and integrations like Avalara and TaxJar. These are designed to help manage, report and simplify tax liability and it’s no surprise they’re common for global retailers operating in the US market.
Avalara integrates into and has native in-platform functionality with Salesforce B2C Commerce, Shopify, Magento, BigCommerce and most popular eCommerce platforms.
TaxJar has integrations with Magento, Shopify, BigCommerce and a number of other platforms and marketplaces.
Reaching out to your eCommerce Systems Integration partner, order management team or 3PL vendors is a great starting point, as they can provide alerting services when you approach a tax liability threshold. They can help identify the states in which you need to register and pay tax.
Also, get in touch with the team at Tryzens for further information.