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Sales tax ruling means new compliance burden for online retailers

A recent U.S. Supreme Court ruling that South Dakota can impose sales tax on online purchases even if a business isn't physically based in the state, will bring new compliance requirements for some Canadian online retailers, U.S. tax accountant Brandon Vucen tells AdvocateDaily.com

The June 21 decision, a challenge to one state’s move to apply sales tax on internet retailers based elsewhere but selling to customers in the state, reverses a 25-year-old ruling that only applied sales tax if the seller had physical presence of property or employees in the state — referred to as ‘sales tax nexus.'

The state’s tax legislation applies to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services.

As Vucen, a principal of U.S. Tax IQ, explains, over time, as states have been attempting to generate more revenue, states have been trying to expand the definition of nexus.

“They’ve brought in other kinds of economic nexus standards, which is the case here — a seller did not have a physical presence but otherwise has economic nexus by virtue of being an online retailer and soliciting customers in the state. So it really is a groundbreaking case and it does overturn the previous physical presence standard,” he says.

Although many larger online retailers likely already collect and remit sales tax sales voluntarily, complying with the requirement will be burdensome for smaller Canadian retailers, says Vucen.

“Canadian companies that conceptually only look at HST or maybe GST and PST, all of a sudden need to consider — there are approximately 10,000 different taxing jurisdictions in the United States — federal, state, county, local, and all those counties may have different sales tax rates, so the compliance burden can be significant. There are software programs to assist sellers, but again, for a small online retailer it can be burdensome.”

Although the requirements vary state by state, Vucen says this decision from the U.S. Supreme Court will likely cause more states to otherwise expound similar economic nexus standards.

“Online retailers should always be aware of the issue and if they're selling into different states they need to consider how those states would tax online sales.”

"The argument for retailers to be able to say that they don't have nexus is becoming more difficult to make,” he adds.

For online retailers who are now required to collect sales tax and fail to do so, the consequences can be costly, he adds.

“The exposure is uncollected sales tax that you should have collected and did not, now the state wants to collect it. So for large dollar transactions, or multiple transactions into the state, it can be a significant risk for retailers."

In addition, Vucen says that although this decision is related to sales tax, it may also impact on income tax nexus, as the two often go hand-in-hand. “Even though it is sales tax, it may empower some states to broaden their income tax nexus standard,” he says.

While the most conservative approach would be to register to collect and remit sales tax if there is any uncertainty, in terms of compliance, Vucen recommends companies take a cost-benefit approach.

“It is the cost-benefit of complying as opposed to the risk of being challenged on an audit. So it may be the case where small online retailers from Canada don't necessarily even look at the U.S. market because of that situation.”

For larger online retailers that plan to keep selling to the U.S., Vucen says the best course of action is to speak to a qualified U.S. tax advisor and consider the issues before you actually start doing business in the state.

“You do not necessarily want to file somewhere or do something that you are not required to. In the end, take all of the different factors into account – again, a cost-benefit analysis — if it is an area of uncertainty then it may be advisable that yes, you do register to charge sales tax.”

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