Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
As Canadian companies grow their business into the United States one area of planning that is often overlooked is the potential impact of state sales tax. In general, sales tax is imposed on sales of tangible personal property. Many, but not all companies, plan for U.S. federal income taxes (and whether they have a permanent establishment or not) and some even look at state corporate income tax nexus but it has been our experience that many companies do not address the state sales tax issue.
Historically, out of state sellers have relied on the Commerce Clause of the United States Constitution (Article 1, Section 8, Clause 3). The clause states that the United States Congress shall have power “to regulate Commerce with foreign Nations, and among several States, and with Indian Tribes.”
In a prior United States Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298) the court ruled that the ability of a state to impose sales tax on an out of state seller, that had no physical presence in the state, was prohibited under the Commerce Clause. The court opinion stated “The State’s enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce.” The Commerce Clause required the seller to have a “substantial nexus”.
The basic rule for collecting sales tax from online sales is: if your business had a physical presence or “nexus” in that state, the company was required to collect and remit applicable sales taxes from on-line customers in that state. If the company did not have a physical presence in that state, the company did not generally have to collect sales tax from on-line sales into that state. That has now changed.
The U.S. Supreme Court on June 21, 2018, in the case of South Dakota v. Wayfair, Inc. et al, in a 5-4 decision, has overturned Quill. The court held, “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Ill., 386 U.S. 753m are overruled.” Thus unless Congress acts to change the law, states will now be allowed to collect sales tax from out of state sellers, including internet sellers.
Many states have access to U.S. customs documents showing the sale and delivery of goods into their state. Historically, because of Quill, state sales tax authorities did not approach the sellers as they did not have the constitutional authority to collect the sales tax. No doubt, this will change. As states have revenue shortfalls they will look at collecting as much revenue as possible. An easy target is foreign sellers (since in reality they don’t vote and wouldn’t have a say in the law).
It should be noted, however, that the nexus standard for the imposition of state corporate income tax and state sales taxes are, in many cases, different and indeed vary state by state. Though the initial Quill decision was in the context of collecting sales tax, The Interstate Income Act of 1959 (P.L. 86-272, Sept. 14, 1959) had previously restricted a state’s ability to impose state corporate income tax on out-of-state sellers.
In light of the Wayfair decision, a question may be raised as to whether a state may now try to impose state corporate income taxes as well. Many states have introduced, in addition to the current physical nexus standard, an economic nexus standard.
Anyone who is remote seller selling tangible personal goods into the U.S., whether directly or via a third party distributor (i.e., Amazon) needs to review their sales tax exposure and take appropriate action. Absent any sales tax exemption certificate they may be liable for collecting and remitting state sales tax.
They may also wish to review their state nexus to determine if they may now also be subject to any state income tax.
We can help
Cadesky U.S. Tax can assist in determining whether you have sales tax nexus or income tax nexus with a state, registering with that state and the filing of any returns. Please reach out to your Cadesky U.S. Ltd contact for more information.
U.S. TAX TIP is provided as a free service to clients and friends of Cadesky U.S. Tax.
The material provided in this U.S. Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither Cadesky Tax nor Cadesky U.S. Tax can accept any liability for the tax consequences that may result from acting based on the contents hereof.