Last month, on June 21, the US Supreme Court issued its highly anticipated ruling in the Wayfair-case, which has an enormous impact on remote sellers, including e-commerce transaction, into the United States.
Under the Commerce clause of the US Constitution, businesses cannot be forced to pay or collect in-state taxes unless they have sufficient connection or nexus with that state. For decades, business-to-consumer sales by remote sellers have, in practice, been free of tax because remote sellers cannot be required to collect, and private consumers, in practice, do not report, the tax. The States could only coerce out-of-state vendors to collect the tax if that vendor met strict physical presence tests as formulated by the US Supreme Court. Physical presence means, a storage place, shop, inventory, or employees present in the state.
As a result, States have been facing significant revenue losses. In addition, the physical presence test provided out-of-state or remote sellers a huge commercial advantage, because they were effectively able to sell product tax free while local, in-state competitors had to charge the sales tax. That has now changed.
With its landmark Wayfair-ruling the Supreme Court has changed its course and widened the door for the States to coerce remote sellers to collect the tax. It is now accepted for States to require businesses to collect sales tax if they have an economic nexus with that state.
The South-Dakota law, challenged in Wayfair, uses a sales standard to create a taxable presence in the state, based on a monetary threshold of annual sales of $100,000 and, alternatively, a minimum number of sale transactions into the state of 200.
These are relatively low thresholds. This new standard will not only affect US companies doing business in another State, but also foreign companies, for example Omani companies, that sell goods physically or electronically to the United States.
Sales tax is levied in 45 US States and the District of Columbia.
Several states also allow local government entities, such as school district or towns to charge additional sales tax, adding thousands of taxing jurisdictions. Although similar in design, the rates and scope differ significantly. Sales tax is not administered centrally by the federal government, but by each state or sometimes local government entity. That also means that tax returns and forms, and filing dates will differ among the jurisdictions, making compliance difficult and expensive.
Several states have already implemented economic nexus rules in their legislation, similar to the ones mentioned earlier, and more states are likely to follow.
Some states may try to collect the sales tax from the remote vendors retroactively.
For Omani businesses selling electronically to the US it is important to determine with which states they do business, what the nexus rules are in each of these state, and whether they have an obligation to collect sales tax. If so, they must register in each state and that also means that the Omani companies must learn the particular compliance rules (such as filing dates) of each state where they must collect taxes.
There exists no Tax Treaty between the US and Oman. However, there is a Free Trade Agreement (FTA), signed in 2009. The FTA provides for equal treatment of sales of goods and services into the other country. That means that Omani companies selling to the US pay the same taxes as US companies do on local sales and cannot be taxed more. Thus, it does not provide relief from taxes.
In summary, the Wayfair-case constitutes a major change for sales tax collection by remote sellers, including those residing outside the US and selling goods and services to the United States.
DR ROBERT BREDERODE
[Dr Robert F van Brederode is of counsel to Crowe Oman. He is a tax lawyer, practitioner and scholar with over 30 years of experience in global VAT. email@example.com]