Online sales into the United States: Are businesses virtually tax-free?
Michael Szewc
by Michael Szewc
US tax treaties with other countries generally exempt foreign entities from income tax when such entities do not have a permanent establishment in the US and sell to US customers through digital means. However, these protections do not extend to other measures of tax.
A business only needs a sufficient connection (“nexus”) with a state or local jurisdiction to be subject to sales and use tax. Sales tax nexus was historically triggered if a business established a physical presence in a state (e.g. offices, inventory, salespeople, or employees).
The US Supreme Court abolished this decades-long requirement in its 2018 decision, South Dakota v. Wayfair, Inc. As a result, states could impose sales and use tax on remote sellers based solely on their economic presence, prompting states with a sales tax regime to enact thresholds based on total sales or number of transactions. Although these thresholds vary by state, the most widely adopted has been USD 100,000 in sales or 200 separate transactions within a 12-month period.
A common misconception is that sales and use tax is only applicable to tangible personal property. Many states have broadened their tax bases to include digital products and services. In particular, the taxation of software-as-a-service has expanded to over 20 states.
Even in a post-Wayfair landscape, foreign businesses should consider the ramifications of having a physical presence in the US.
Maintaining inventory with a third-party logistics provider can create nexus, and therefore collection and remittance responsibilities, long before the economic thresholds are met.
Some of these services (e.g. Fulfilled by Amazon) can even create these requirements in numerous states as property is moved and stored across the country.
Drop shipping can pose unique burdens on foreign businesses making remote sales in the US. The transaction between a wholesaler and distributor should qualify under the resale exemption; however, exempt sales are only exempt if the proper documentation is presented.
If a retailer isn't registered in the ship to state, they may not be able to issue a valid resale certificate and will be subject to sales tax themselves. Retailers generally can't pass along the tax charged by the supplier unless they are registered to collect that state's tax.
Inbound businesses need to proactively evaluate their tax obligations
Foreign businesses with no US presence may consider themselves beyond the legal jurisdiction of state and local taxing authorities. However, foreign businesses may be subject to sales and use taxes in various US states, and failure to register, collect, and remit sales tax may have long-term consequences for the business.
The liability for sales and use taxes can transfer to a successor entity or individual, which may limit the desirability of the business, especially to US-based investors. Therefore, inbound businesses should proactively evaluate their state and local sales and use tax obligations.
GGI member firmMowery & Schoenfeld, LLCLincolnshire, IL 60069T: +1 224 278 9853
Auditing & Accounting, Tax
Mowery & Schoenfeld is an accounting, advisory, and IT firm in Chicago with offices in Miami and Manilia, Philippines. With 20 partners and 160 employees, we are dedicated to values of People, Clients, Growth, & Adaptability. Our growing international practice is focused on LATAM and multinational advisory.
Michael Szewc is the Director of State and Local Tax (SALT) Services at Mowery & Schoenfeld. His area of expertise is income tax compliance and sales and use tax consulting. Michael works with businesses of all industries and sizes helping them to navigate the complexities of state taxing regimes. Contact Michael.
