Overturning the Quill Corp Vs North Dakota ruling of 1992, the United States Supreme has greatly changed the dynamics of state sales tax law and impact on US and Canadian Retailers selling online in U.S. The United States Supreme court has now ruled in favor of states choosing to levy sales tax on online purchases in the South Dakota against Wayfair case. This means that regardless of whether a retailer has a physical location in the state or not, if the state should so choose, the retailer must collect sales tax from consumers of the state on their purchases.
The History
In Quill Corp. v. North Dakota (“Quill”)¹, the U.S. Supreme Court held that a state could not require a seller to collect and remit sales tax in a state unless the taxpayer had a physical presence in the state or established sales tax nexus. Since that decision, CPAs generally have advised their clients that they were not required to collect and remit sales tax in another state unless the client had a physical presence in the state.
In 2016, South Dakota directly challenged the Quill decision² by enacting a law requiring remote sellers (sellers without a physical presence in the state) to collect and remit sales tax to the state if the seller had sales exceeding $100,000, or 200 separate sales transactions, with South Dakota customers.
The New Law
The U.S. Supreme court decided that states may collect sales tax from out-of-state (including foreign individuals or companies) retailers, that operate solely remotely online or physically located in different state, even if the seller does not have a physical presence in the buyer state.
The court decision leaves it to up to each individual state to levy sales tax laws and make decisions about who should pay state sales and use taxes, and collection of sales and use tax. In simple terms, the new supreme court decision only eliminated physical presence as a mandatory requirement in levying sales tax.
Takeaways from the US Supreme Court Case:
- The law does not apply retroactively, and
- Physical presence is not mandatory for sales and use tax collection
- The law provides safe harbor for sellers with limited business activity in South Dakota
Impact on US Retailers
Large scale nationwide retailers like Amazon, eBay and Etsy may now have to collect sales taxes depending on each state of sale. While other retailers have a lot of catching up to do, Amazon has already been collecting sales taxes on direct purchases nationwide since mid-2017. This law would mean state expectations of tax collection on third party vendor selling on Amazon.
Read about should you incorporate or not under the new tax laws? and Small Businesses: Facing challenges In Tax Preparation.
Impact on Canadian Retailers
Canadian retailers selling in the United States could be required to register in the state for collection and payment of sales and use tax. Furthermore, the ruling in South Dakota case provides an opportunity for Canadian retailer selling in U.S to also reassess where it has state income tax filing requirements in light of new ruling.
State sale tax laws are complex so great in depth knowledge is required to tackle your unique issues. Contact us so our cross-border tax professionals can help you with changing landscape of State Sales Tax.
In summary, state sales tax laws should be continuously monitored as traditional nexus rule of physical presence is being extended to economic nexus rule is the age of technology.
Also read about Canadian residents providing self-employed personal services in the US, Independent Canadian contractors and Canadian corporations providing personal services in US and Canadian Employed in US by Canadian Company.
¹Quill Corp v. North Dakota, 504 U.S. 298.
²South Dakota v. Wayfair, Inc., 585 U.S. (2018).
