The WayFair Case. And the Way Ahead, Fair or Not…
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Something monumental has just occurred regarding the expansion of the sales tax net which will now capture many more businesses, including those based in Israel and selling to US clients. Such businesses may need to increase the overall charge for their product to include sales tax as well as carry the burden of collecting and reporting the tax. Additionally, such companies would be exposed to audits by various states and localities.
While the concept of U.S. sales tax is similar to Israeli VAT regulations, the actual implementation and definitions are vastly different. For a detailed explanation on the basics of U.S. sales tax, see our previous post here.
Background on the Supreme Court Case
The proliferation of online shopping has led to tremendous losses, not only to the brick and mortar stores, but also to the states’ sales tax revenue. The reason being that the way the sales tax regulations were in effect to date, many online sales were exempt from sales tax collection at the point of sale. Therefore, many states started expanding the rules in order to obligate businesses to file and report more and more sales for tax collection purposes. For e-commerce business, meaning the typical company selling via Amazon, this could translate into a requirement to collect and file sales tax in the states in which Amazon is storing the company’s inventory at various logistic centers around the US.
But even more so, there are many states which have gone one step further and imposed the remote seller nexus rules. These regulations apply when a company which has no connection to a state yet reaches either 200 transactions or as little as $10,000 of sales in such states. If the above thresholds are met, it likely results in a sales tax collection and filing requirement or what is known as “use tax reporting”. The latter generally involves a burdensome four-step process notifying your customer that while you have not collected sales tax, the customer is required to report and pay such tax directly to the state authorities. Furthermore, the company would then report the details of the consumer and the amount of the sale to the state authority so that the consumer is on record to remit the sales tax. Essentially, sales tax will be charged to the customer in either case, it is just a question of who will actually remit the tax to the state, will the Seller carry the burden, or will it pass both the cost and the headache on to the customer?
Now not only you but many other companies found this to be a tremendous burden. So much so, that recently WayFair Inc. (an online home furnishings company) was involved in a case which escalated all the way up to the U.S. Supreme Court to rule on this matter – can states force businesses without nexus in their state to comply with these stringent regulations? And indeed the U.S. Supreme Court ruled that it is constitutional for states to impose these regulations and obligate businesses to abide by them regarding sales into their state. As such, many additional states may jump on this bandwagon.
The ruling of this case was intended to level the playing field so that there is no greater advantage to purchasing online than the local store. However, while the original target was for e-commerce businesses, the definitions of remote seller include many tech companies selling to customers in a state in which they may not have any employees or offices but do meet the sales threshold amount. Therefore, the impact of this case will be widespread, not only affecting e-commerce businesses but potentially any business, whether U.S. or foreign, selling to U.S. customers in amounts of $10,000 or more per state.
How does this affect your company?
Assess your sales directly to end users
Calculate the sales per state
Determine if any of those states have imposed the remote seller nexus regulations
Review the regulations as to whether those states consider your product/service to be taxable
Implement the sales tax collection and filing process
For more information on how this applies to your case, please feel free to reach out to us at firstname.lastname@example.org.