US sales tax Wayfair ruling and foreign sellers

On 21 June 2018, the US Supreme Court introduced a new ‘economic nexus’ test to determine if out-of-state online retailers are responsible for charging Sales Tax – South Dakota vs Wayfair, Inc (2018). The result will drag many non-US online and concession retailers into the US sales tax net for the first time.

Wayfair changes the basis of tax to the location of the consumer, even if the vendore is not resident in the state, reflecting the rules of most countries' VAT and GST rules, including the EU.

The ruling effectively overturned the previous test, Quill (1992) Supreme Court ruling on this issue, which limited the obligation to charge state or local sales tax to retailers with a physical presence in the states – which could be interpreted by states as employees or even just visiting sales people.

The Quill ruling had meant that non-resident retailers selling to US consumers were largely exempt from having to charge state or local sales tax to their customers. But the South Dakota ruling extended this to merely selling remotely into the state. This is similar to the EU distance selling VAT rules, and many other countries around the world apply the same non-resident seller liabilities.

In addition to state sales tax, non-US Sellers may also have to consider the thousands of local sales tax jurisdictions. Companies will need to ensure they have adequate tracking of the exact location of their US customers, and what additional Sales Tax rates calculations, collections and filings will be required.

The Wayfair ruling included upholding a South Dakota sales tax registration threshold of $100,000 or if the seller has more than 200 individual transactions in the state. Most other states have implemented similar thresholds, ranging up to $500,000 per annum.