Compliance with the dozens of state laws that have emerged in the aftermath of the U.S. Supreme Court’s decision in South Dakota v. Wayfair has been a challenge for domestic e-retailers, but what about remote sellers and marketplace facilitators located overseas? To gain some perspective on the challenges facing sellers operating in the European Union and other jurisdictions, Bloomberg Tax spoke with Florian S. Zawodsky, a senior tax consultant with Ernst & Young LLP in Berlin. Here’s a shortened version of the discussion.
Bloomberg Tax: What is the general awareness of the Wayfair ruling among remote sellers in Germany and other EU countries?
Zawodsky: From a German (and also European) perspective, the obligation to levy a consumption tax—no matter where the recipient of a supply or a service resides—is already well-understood by all businesses operating in the European marketplace. In this vein, the pre-Wayfair era for U.S. sales tax compliance based on a physical presence was unique and unusual to these sellers. Ironically, the Wayfair decision actually aligns consumption tax compliance with concepts German businesses already understood in dealing with sales to customers outside of their home taxing jurisdiction. However, for most German businesses, information in our language on the Wayfair decision, state compliance responses, and its implications for German businesses selling to U.S. customers is scarce. In addition, many Germany-based tax advisors seem to lack sufficient experience or knowledge to provide accurate advice. In my own experience, only between 10% and 20% of German sellers devote the necessary amount of time to the implications of Wayfair.
Bloomberg Tax: What are the biggest areas of confusion for EU remote sellers with regard to Wayfair compliance?
• The wide variety and enormous complexity of the different U.S. state and local sales tax regimes and differentiation among states as to taxable products or services.
• The variety of technical systems that are applied to levy, collect, and report the taxes.
• Gaps in understanding that sales tax collection, filing, and remittance obligations are not limited to business-to-consumer transactions. Business-to-business sales are subject to tax as well.
• Confusion around the fact that the concept of permanent establishment and treaty protections do not apply to U.S. state sales taxes.
Bloomberg Tax: To what extent have EU sellers embarked on Wayfair compliance strategies?
Zawodsky: I have not seen many begin to implement such compliance strategies, although I have recommended automated solutions. Non-automated solutions appear to be completely impracticable. Several sellers have connected with our U.S. sales tax teams to explore options or to discuss outsourcing models.
Bloomberg Tax: Do you suspect some EU sellers will forgo Wayfair collection and remittance duties?
Zawodsky: I don’t believe EU sellers will simply forego their sales and use tax collection and remittance duties in the U.S. Since all are fully aware that VAT evasion is seriously prosecuted, they know the same thing will happen for sales tax purposes. For example, EU sellers are aware that the UK and Germany already have joint and several liability rules for suppliers which are made over platforms. Austria will follow next year. In addition, EU companies have begun to understand that under U.S. state successor liability rules, significant sales tax exposures could significantly inhibit marketability and market value in the M&A space.
Bloomberg Tax: Are most EU remote sellers transacting business over marketplaces such as Amazon.com Inc. and eBay Inc., or from their own platforms?
Zawodsky: I assume many EU remote sellers are doing business over the major, global online marketplaces, especially start-up retailers who commonly start by selling through the digital platforms. There are several significant EU-based marketplace facilitators that serve U.S. markets, and they are faced with extreme complexity and risk given the varied and untested marketplace facilitator nexus statutes.
Bloomberg Tax: Are marketplaces seen as a useful tool for compliance purposes?
Zawodsky: In my view, the inclusion of digital platforms is the key to success. To be fair, knowing all consumption tax systems in the world, or even only the complex one in the U.S., is quite difficult. Technology must be used in order to develop systems that enable the sellers to identify the jurisdictions in which their customers are located and in which their products or services are being sold and which can automatically determine the correct tax treatment so that it automatically pops out of a system.
Bloomberg Tax: To what extent will EU remote sellers use certified software providers and outside tax services to support their Wayfair compliance efforts?
Zawodsky: My own view is they likely won’t have any other choice since the U.S. system is so different than the EU VAT system. From a cost-benefits perspective and the high learning curve, I believe reliance on automated, certified software will, in the short term, be the most likely means by which EU sellers will comply with U.S. sales tax compliance efforts.
Florian S. Zawodsky is a Senior Consultant in EY’s National Tax Office in Berlin and is part of the EY VAT e-Commerce Team in Germany. He is also writing his PhD thesis at the University of Mannheim.