How Multinational Retailers Can Sustain Tax Compliance as Economic Nexus Rules Ripple Through the U.S.

Charles Maniace
October 4, 2018

In June, the United States Supreme Court announced its decision in the highly-anticipated and hotly-debated South Dakota v. Wayfair case, ruling in favor of South Dakota. Immediately, this decision triggered panic among eCommerce retailers across the country. What would this mean for their sales tax collection obligations? Would they be on the hook in a host of new jurisdictions? Would they be penalized retroactively for failing to collect in these areas?

The answers to those questions, and many others, can be found in our South Dakota v. Wayfair resource center. But for multinational retailers, this ruling could have equally expansive implications.

What does South Dakota v. Wayfair mean for multinational retailers?

With the Wayfair decision only four months behind us, more than half the country has enacted laws, rules, or regulations that seek to tax remote commerce. In fact, October 1 was widely recognized amongst those of us in tax circles as “Economic Nexus Monday” where we saw 9 states begin enforcement of their new rules. At this pace, it seems that the vast majority of the country will have a plan to tax remote sellers by year end.

Each state will have varying standards, but the intent is the same across the board: To tax remote retailers based on either the total dollar value of transactions they have with consumers within their borders, or to tax retailers based on the total number of transactions. What has yet to fully shake out is how those numbers are computed. Does the “total dollar value of transactions” include non-taxed sales? In most states, but not all, the answer is yes. Are monthly subscription charges considered 12 separate transactions or a single transaction for computing the “total number of transactions?” The answer to this question is largely unknown.

South Dakota’s standard, which is clearly serving as a barometer for other states, is 200 or more separate transactions or more than $100,000 in sales to South Dakota residents in the prior or current calendar year. For ecommerce retailers, this could present a massive shift in the way they approach their compliance efforts.

But what about multinational sellers? Well, this new wave of regulation will apply equally to them as it will to domestic-only sellers. These new requirements are binding and there is no legal barrier to imposing them upon multinational or foreign retailers. While there may be a slightly different constitutional standard as it applies to evaluating the validity of tax laws imposed on non-U.S. business entities, once a state lawfully imposes an economic nexus rule, retailers are subject to the rule if they meet the set threshold.

This should not necessarily come as a surprise to those who operate in a number of different geographic regions – we have seen countries around the world enact similar rules to require sellers to register for value-added tax (VAT) and collect VAT when selling to consumers within their jurisdictions. In many ways, South Dakota v. Wayfair as it applies to non-U.S. sellers is an extension of a global trend to tax remote sellers.

What should multinationals do to prepare for state economic nexus laws?

This is the new reality in the U.S., and as such, multinationals need to prepare themselves for the future of sales and use tax. First, they need to consider the risks they run by insufficiently collecting tax: Do they plan to expand geographically? Will they ultimately find themselves seeking a physical location in a state that views them as tax evaders? Do they have assets located in a state that could be subject to seizure based upon adverse audit assessment for failure to collect and remit sales tax properly? Do they risk tarnishing their reputation by potentially being perceived as purposefully evading these new tax requirements? Could states apply a form of garnishment against future payables from your in-state customers to pay off an assessed tax liability? It hasn’t been tried yet, but it’s certainly possible.

Any of these risks could be financially crippling, and could even lead to further prosecution by states or even the federal government. To avoid this fate, multinationals need to move fast and find a comprehensive compliance solution to handle their newfound obligations, which will tend to be greater and more complex than those of smaller domestic sellers.

What’s the best solution for handling the future of modern tax?

Tax automation software is a means for easing the burdens of sales tax on businesses of all sizes and is an important part of making sales tax compliance manageable and affordable. While there are a number of solutions available today, it’s important multinational retailers spend time determining which solution is best for their organization’s unique needs. Start by asking the following questions:

  1. Does the solution have processes and procedures designed to handle the pace and rate of regulatory change?
  2. Does the solution meet my requirements today? Does it support the jurisdictions where I collect tax now, and does it contain rates and rules that address the products and services I sell and the way I sell them?
  3. Does the solution meet my requirements in the future? In this new era of modern tax, finding a solution that meets your requirements today as well as tomorrow is the far better option.

South Dakota v. Wayfair has created a whole new world of sales and use tax obligations for companies around the globe. The dust has yet to fully settle to date; after all, only a few months have passed since the Supreme Court made its landscape-redefining decision. But state governments will not wait to impose new regulations and requirements on sellers. It is now imperative for organizations to arm themselves with the most advanced tools and platforms to effectively navigate this strange new world and solve tax for good.

Take Action

For more on the aftermath of the South Dakota v. Wayfair decision, head over to the Sovos resource center to find comprehensive coverage in the form of blogs, videos, and more. 

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Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos. An attorney by trade, Chuck leads a team of attorneys responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Over his 14 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a B.S. in Business Economics from Bentley College, a J.D. from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.
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