July 11, 2018

Canadian Businesses Selling into the U.S. Face New Sales Tax Rules

The state sales tax laws in the U.S. have benefited many out-of-state online remote sellers and their customers, because of a 1992 U.S. Supreme Court case.¹ However, that is about to change dramatically for many out-of-state sellers, including foreign sellers, because of a new U.S. Supreme Court case decided June 21, 2018. For example, Canadian businesses selling into the U.S., will now have a new maze of rules to address - often different rules for each state in which sales are made.

The 1992 U.S. Supreme Court case decided that states could not levy sales tax on out-of-state online sellers if the seller had “no physical presence in the taxing state”. Since then, frustrated by their loss of revenue on sales to their residents, the states have enacted a complex series of alternative (innovative) “nexus” sales tax laws to attempt to circumvent the 1992 ruling. They include such concepts as “Click Through Nexus”, “Affiliate Nexus”, and “Economic Nexus” (for example, having a prescribed volume of sales in the state, even when there is no physical presence in the state). The U.S. Supreme Court has not yet addressed any of those laws.

THE NEW LAW

The new 2018 Supreme Court case,² which specifically addressed the existing South Dakota sales tax law, overrode the 1992 law. The court decided that states may collect sales tax from out-of-state (including foreign) retailers, that operate solely remotely online, even if the seller does not have a physical presence in the taxing state. The court decision leaves to the individual state sales tax laws the decisions about who should pay state sales and use taxes, and how they should be collected. In other words, the new court decision only eliminated physical presence as a mandatory requirement in levying sales tax, it did not conclude that South Dakota’s law was valid. After eliminating the physical presence requirement, the U.S. Supreme Court remanded the case back to the Supreme Court of South Dakota to review the validity of the remainder of the South Dakota law.

The U.S. Supreme Court made its decision in the context of examining South Dakota’s law, which it said tends to minimize any burden on interstate commerce, because:

1. Its law provides a safe harbor for those who transact only limited business in South Dakota,
2. It does not apply retroactively, and
3. South Dakota has signed on as a member of the “Streamlined Sales and Use Tax Agreement”. This is an agreement, involving more than 20 states, which standardizes sales tax laws to reduce administrative and compliance costs, provides uniform definitions, and rules, simplifies the sales tax structure, and offers sales tax administration software free of charge (and freedom from audit liability for those who use it).

Thus, the future validity of any state’s online sales tax law may depend, in part, on the burden it imposes on sellers.

WHAT HAPPENS NEXT? 

The next moves will be up to the states, and perhaps the U.S. Congress. Thirty-one states now have sales tax laws attempting to tax internet sales, but many sellers to states other than South Dakota, may still be able to challenge the state law when the burden imposed on sellers by that state’s legislation is too great, as measured against the “lenient” South Dakota law. Hence, there may be a rush in many states to pass new sales tax laws and/or amend existing ones, using the South Dakota law as guidance.

The South Dakota law levies sales tax on out-of-state online remote sellers if the seller’s annual sales into South Dakota exceed $100,000, or if there are more than 200 transactions annually. Other states may have lower thresholds. Thus, it appears many Canadian corporations selling into the U.S., and others, will now have U.S. state sales tax liabilities, even if no-one from the Canadian business ever enters the particular state where sales are made. The state sales tax laws should be continuously monitored for any changes.

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¹ Quill Corp v. North Dakota, 504 U.S. 298.
² South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).