CANADIAN COMPANIES selling into the United States — even those with no physical presence in a particular state — may now be required to collect and remit local sales taxes.
“There are some 10,000 different state and local sales tax regimes in the US,” said Ted Citrome, a tax lawyer in Dickinson Wright LLP’s Toronto office. “It’s going to be a tremendous burden for companies to track and monitor sales so they can ensure they stay onside.”
The expansion of states’ taxing powers emerges from the recent decision of the Supreme Court of the United States (SCOTUS) in South Dakota v. Wayfair, Inc., which expressly overturned SCOTUS’s 1992 decision in Quill Corp. v. North Dakota.
“Wayfair is the court’s most significant state tax decision in at least 30 years,” says Peter Glicklich, a tax lawyer in the New York office of Davies Ward Phillips & Vineberg LLP.
The US Constitution’s commerce clause prohibits states from imposing sales tax on sellers who lack “minimum contacts” with the state, a provision that Quill interpreted as requiring a physical presence such as a store or warehouse in the state.
However, the Quill decision preceded the emergence of the Internet as a distribution and sales conduit. Ultimately, the decision allowed online retailers who conducted business in absentia to ignore local taxes. As SCOTUS saw it, Quill resulted in a “judicially created tax shelter” that produced annual losses of between $8 and $33 billion for the states.
South Dakota was one of several states that ignored the constitutional issues surrounding online retailers and enacted a law imposing sales tax on sellers who annually delivered more than $100,000 of goods into the state or made more than 200 deliveries locally. That degree of activity, SCOTUS ruled, satisfied the “minimum contact” requirement because “a business may be present in a State in a meaningful way without that presence being physical in the traditional sense” of the term.
“The Wayfair decision seems to have held that South Dakota’s model of remote nexus, at least, is in fact constitutional,” Glicklich says.
And while the court did not attempt an exhaustive definition of “minimum contact” or stipulate the precise degree or nature of the presence required to attract states’ sales tax jurisdiction, the overall tone was expansive.
“The court even hinted at a new test for substantial nexus based on ‘substantial virtual connections,’ which would be a type of physical presence established via customers’ computers through, for example, cookies left on customers’ hard drives or apps downloaded onto customers’ phones,” he says.
The upshot is that it’s not clear whether thresholds below those in the South Dakota law that drove Wayfair would be constitutional. Until or unless that’s clarified by legislation or further decisions, Canadians shipping into the US will be in a bind.
“At the oral arguments for the Wayfair case, the suggestion was made that a single sale would be sufficient to subject a remote seller to sales tax in a jurisdiction,” Glicklich said. “Since states and localities now have an incentive to make their nexus standards as low as possible, the compliance burden for online retailers could turn out to be mind-boggling.”
Indeed, some companies may not discover that they have sales tax collection obligations until it’s too late. “We can only hope that these laws will be drafted in a way that gives rise to the liability to collect only after the obligation to do so has been determined,” Citrome says.
Whether or not that’s wishful thinking remains to be seen. “Now that Pandora’s box is open, some states might even try to collect sales taxes retroactively,” he adds.
At the very least, Canadian businesses selling online into the US should consider acquiring or modifying software to track these sales and determine their liability.
“If [businesses] wait too long the numbers could be crippling, even if the laws are not retroactive,” Glicklich says. “Companies should also consider contractual language with their distributors, shippers and others to make it clear who is responsible for collecting the taxes.”
Ultimately, Glicklich maintains, Congress will have to act. “Someone’s going to have to do something to smooth this out and establish minimums so that we can have the type of coherence and consistency that will make it easier to comply with these laws,” he says.
Meanwhile, similar legislation may be coming to Canada. “Québec is introducing new laws that would extend collection and remittance obligations for Québec sales tax to non-residents of the province,” Citrome says.