According to the Association of International Certified Professional Accountants (AICPA), in 2018 the United States Supreme Court issued a landmark ruling known as the Wayfair decision. This ruling stipulates that each state within the United States can require companies that have met a specific threshold for number of sales made in that state to collect sales taxes from their customers, irrespective of whether the seller maintains a physical presence in that state. This ruling has had a number of impacts on Canadian organizations and individuals conducting transactions remotely and on non-resident vendors that sell to Canadian consumers. Read about the Wayfair ruling, including its sales tax implications, and explore how a Nova Scotia tax attorney can assist with these matters by contacting Jeremy Scott Law at (902) 403-7201.
What Is the Background to the Wayfair Ruling?
Before the Supreme Court made the decision in South Dakota v. Wayfair, known as the Wayfair case, the ruling in Quill Corp. v. North Dakota had stated that it was unnecessary for businesses to collate sales taxes from their customers in a specific state provided the businesses themselves were not physically located there. Here, being physically located in a state refers to maintaining a warehouse, inventory, office space, contractors, or employees there. Worth noting is that the Supreme Court made this ruling in 1992 when sales were predominately completed in physical stores.
Today, e-commerce plays a vital role in business transactions, with many sales conducted online. One of the key arguments in the Wayfair decision was that the ruling in Quill Corp. v. North Dakota had not anticipated these shifts in consumer behavior, or the disadvantages local retailers with physical storefronts, obliged to charge states sales tax, would experience in competing against e-commerce businesses offering expedited shipping and charging no sales tax.
What Was the Wayfair Sales Tax Decision?
The Wayfair decision was a legal ruling made by the United States Supreme Court in a case involving South Dakota and several companies, including Wayfair, NewEgg, and Overstock.com. In its suit, the state challenged the exemption from collecting sales tax from customers that businesses without a physical location in the state enjoyed under the precedent set out in Quill Corp. v. North Dakota. In the Wayfair case, the Supreme Court ruled 5-4 in South Dakota’s favor, supporting their legislation demanding that online sellers without a physical presence in South Dakota collect sales taxes from their customers.
How Did the Wayfair Decision Alter the Approach to the Sales Tax Nexus?
Because of the decision made in the Wayfair case, states can require businesses to gather sales taxes from their consumers even if the business does not maintain a physical presence in that location. The Wayfair ruling means remote retailers are now typically required to collect sales taxes and remit these monies. Following this ruling, the majority of states have brought in new rules stipulating when there is a sales tax obligation, referred to as a nexus.
While specific requirements vary from state to state, the widespread adoption of rules requiring individuals and organizations conducting business within a state to collect sales tax from customers located in that state and remit this tax to the state authorities, independent of where the seller is located, has significantly complicated tax compliance for businesses that offer remote retail or service options, not only within the United States but in other countries, including Canada. Retail operations such as inbound companies, phone order sellers, and e-commerce organizations, have been especially impacted. Learn more about the Wayfair ruling and its effects by arranging a consultation with a seasoned Nova Scotia tax lawyer from Jeremy Scott Law.
What Was the Result of the Wayfair Case?
The conclusion of the Wayfair case was that the precedent established by the Quill ruling, that businesses without a physical presence in a state could not be compelled to collect and remit sales taxes in that state, was unsound, leading to the Supreme Court to overturn the earlier ruling. The majority opinion, written by Justice Kennedy, noted that the rise of the Internet had altered the economy’s dynamics, as demonstrated by the fact that e-commerce revenues at the time of the Wayfair decision were significantly higher than the revenues for mail-order goods during the Quill decision.
Kennedy, writing for a majority that included Justices Alito, Ginsburg, Thomas, and Gorsuch, additionally critiqued how several online retailers, including Wayfair, highlighted in their marketing the benefits of not charging any sales taxes to customers, essentially aiding tax evasion. While the Wayfair ruling did not specify whether it would be possible for states to collect sales taxes retrospectively, the majority opinion mentioned that the Court might consider this question at a later date.
What Is Wayfair Tax Reform?
In light of the United States Supreme Court’s decision in the Wayfair case, in 2021 the Canadian Government enacted several changes to its own tax system to achieve greater parity with Canada’s neighboring nation. These changes, discussed below, focused on non-resident sellers who made sales to Canadian consumers exceeding $30,000 per year:
Digital Goods and Services
The post-Wayfair tax reforms in Canada involved requiring non-resident vendors of digital services and goods to register for the Goods and Services Tax (GST), or Harmonized Sales Tax (HST) in states that combine provincial with federal sales taxes. These reforms also imposed commensurate requirements for non-resident vendors to collect GST/HST on sales to Canadian consumers and remit these taxes to the Canada Revenue Agency (CRA). Worth noting is that this applies only to business-to-consumer (B2C) sales. If the sales from the non-resident vendor to Canadian consumers occurred via an online distribution platform, the responsibility for registering, collecting, and remitting the sales taxes falls on the platform.
Non-resident vendors that store and ship goods in Canada via fulfillment warehouses must now register, collect, and remit HST or GST on sales to Canadian customers. Fulfillment firms also need to check vendors’ registration status and maintain records concerning non-resident customers and the products stored on these clients’ behalf.
Before the 2021 Canadian tax reforms, online platforms offering short-term accommodations did not have to collect and remit sales tax, as this was the property owner’s responsibility. The current system still places the responsibility of collecting and remitting the sales tax on property owners; however, the accommodation platform becomes liable if an owner does not have a GST/HST registration.
Contact a Nova Scotia Tax Attorney Today
The Wayfair decision has the potential to significantly affect Canadian businesses operating in the United States since states no longer require companies to be physically there, so long as they do a certain number of transactions in that state, to enforce the collection of sales taxes. Individuals and businesses may consider contacting a tax lawyer to understand their exposure to sales tax in different states. Learn more about the Wayfair ruling and find out how a Nova Scotia tax attorney can help people with their tax issues by calling (902) 403-7201