Initial fears that foreign-based retailers would forgo state tax compliance duties under the U.S. Supreme Court ruling in South Dakota v. Wayfair now appear overblown, practitioners and tax policy analysts told Bloomberg Tax.
Several themes have emerged in the year following the Supreme Court’s landmark ruling suggesting most overseas sellers will eventually move toward compliance with Wayfair-inspired state sales and use tax laws:
- Awareness of state remote seller and marketplace facilitator statutes is growing.
- States have a variety of last-resort enforcement mechanisms at their disposal.
- Overseas retailers that rely on marketplace platforms to sell their products—a rapidly growing segment within e-commerce—will be hustled into tax compliance whether they like it or not.
“The game changer will be the platforms,” said Richard Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law and an authority on state and local taxation. “If a retailer sells over any of the platforms in a state that has platform legislation—and they all will eventually because it’s a no-brainer—Amazon, Target, eBay, Walmart will collect. That’s the end of the game and the tax avoidance opportunities will be eliminated.”
And if past performance is a reliable indicator, Pomp said, there have been no major examples of noncompliance by a foreign vendor.
In Wayfair, the high court tossed out its 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers to collect sales tax if they had more than $100,000 in in-state sales or 200 transactions would pass constitutional muster.
Since the ruling, dozens of states have passed versions of South Dakota’s law or have enforced laws they already had on the books. Many states are also imposing collection duties on marketplace facilitators such as Amazon.com Inc., eBay Inc., and Etsy Inc. that host sellers on their sales platforms.
In the immediate aftermath of the Wayfair ruling, some Asian and European Union companies dismissed South Dakota’s confrontation with e-retailers as a domestic donnybrook from which they had immunity. As the dust settled, however, tax advisors began warning their clients of potential duties to collect and remit taxes, even if they had no physical presence in the U.S.
The retailers had a valid rationale for their confusion, said Steven N. Wlodychak, a principal in Ernst & Young LLP’s Indirect (State and Local) Tax practice.
Foreign sellers with no permanent establishment in the U.S. who are operating under a comprehensive tax treaty with the U.S. are generally insulated from U.S. tax obligations. Permanent establishment is a creature of international tax treaties similar to U.S. notions of physical presence. But Article 2 of the U.S. Model Income Tax Convention specifies such protections extend only to federal income taxes and deny coverage under state income tax programs, Wlodychak said.
Even in cases where a state adopts U.S. treaty provisions, the protection doesn’t extend to sales and use tax obligations.
Against this framework, Wlodychak said tax advisors have had to educate foreign clients that their notions of permanent establishment aren’t meaningful under the economic presence system expressed in Wayfair.
“It’s a huge adjustment, and there was a lot of denial,” Wlodychak said.
Multinationals Adapted Quickly
That said, awareness of the ruling is growing.
Foreign-based multinationals with vigorous tax departments have adapted quickly to the Wayfair ruling and the obligations imposed by the states, Richard Cram, director of the national nexus program at the Multistate Tax Commission, told Bloomberg Tax.
E-retailers in Europe, in particular, tend to understand the rationale behind Wayfair based on their familiarity with the European Union’s value added tax (VAT) system, which is a consumption tax assessed on the value added to goods and services.
“There is a fairly good level of knowledge of the obligation to collect state sales and use taxes among foreign sellers—particularly the larger ones, who are likely to have retained U.S. SALT counsel and advisors,” Cram said in an email. “They are used to having to deal with the VAT, so would expect there to be some type of collection obligation.”
Awareness of Wayfair, however, could be lacking among smaller EU businesses, said Florian S. Zawodsky, an international tax consultant with Ernst & Young in Berlin.
“Many Germany-based tax advisors seem to lack sufficient experience or knowledge to provide accurate advice,” Zawodsky said in an email. “Many German sellers find the U.S. system enormously complex and difficult to comply with. In my own experience, only between 10% and 20% of German sellers devote the necessary amount of time to the implications of Wayfair.”
Despite this learning curve, Zawodsky agreed the EU’s VAT system creates a foundation for understanding and compliance. Conformity with the emerging state sales tax obligations will grow, he said, and tax avoidance will be minimal.
“I don’t believe EU sellers will simply forego their U.S. sales and use tax collection and remittance duties,” Zawodsky said. “Since all are fully aware that VAT evasion is seriously prosecuted, they know the same thing will happen for sales tax purposes.”
De Facto Collection Departments
Regardless of any awareness gaps, Cram and Pomp predicted marketplace facilitators would essentially become the collection departments of state revenue agencies. E-commerce titans such as Amazon and Walmart, and also marketplaces based in foreign jurisdictions such as China-based Alibaba Group Ltd., have been forced to perform collection and remittance duties for the millions of sellers on their platforms.
“Any foreign seller using such marketplaces will be subject to those collection requirements,” Cram said.
C. Daniel Hassell, revenue secretary for Pennsylvania, said the facilitator laws are significant because of the volume of sellers using the marketplaces. He noted that Amazon CEO Jeff Bezos recently disclosed that third-party sales grew to 58% of all company business in 2018—a 2% bump from the previous year.
And foreign vendors and marketplaces are clearly riding this train.
Hassell pointed to data showing 40% of top sellers on Amazon are based in China. Alibaba, the biggest e-commerce company in China,just registered for a Pennsylvania sales tax license.
“In this online retail world, the marketplaces are growing very rapidly—Amazon in particular, but others as well. Walmart is working very hard to set up a similar kind of infrastructure,” Hassell said. “A key point of access for foreign sellers will be through those marketplaces. If we continue to be successful making sure the marketplaces collect tax, then foreign sellers on those platforms will come along.”
Flying Beyond State Dragnets
Still, some revenue hawks worry that tax scofflaws could emerge. In theory, foreign businesses without permanent establishments in the U.S., selling directly to consumers, could avoid the enforcement dragnets of state revenue departments.
But Pomp expressed doubts about any concerted strategies to defy the Wayfair tax web. Revenue agencies have important enforcement tools at their disposal. For instance, revenue departments could seize inventory parked in U.S. distribution centers to satisfy outstanding tax liabilities. Similarly, departments could seize cash from uncooperative foreign vendors using U.S. banks to process credit card transactions.
Pomp said foreign sellers declining to comply with state tax laws would suffer considerable reputation risk. He called initial fears regarding foreign sellers “exaggerated.”