Meeting the regulations of the American sales tax system sometimes requires a great deal more effort and expense than it does in Switzerland. Sales tax is collected at the level of the individual states, so the obligations for payment and the rates of sales tax vary a great deal from state to state.
Previously: No obligation to charge sales tax for businesses with no physical presence
Previously, all the states basically adhered to a ruling from 1992, which interpreted the Commerce Clause in the American Constitution to the effect that an obligation to pay sales tax only arises where the business has a physical presence (e.g. business premises, or a “nexus” in the language used by the states) within the relevant state. It was primarily companies operating in online and software trade who benefitted from this ruling, since they were able to avoid any duty to pay sales tax thanks to their lack of physical presence in the federal states.
The state of South Dakota found itself facing a considerable loss in tax revenues as a result of this interpretation – particularly given that the state does not levy any income tax. As a result of this, a new law was passed in 2016, according to which the obligation to pay sales tax was no longer related merely to physical presence, but to a so-called “economic nexus”. If annual sales within the state exceeded 100,000 US dollars or a sales volume of 200 transactions, then sales tax had to be paid regardless of physical presence, provided that all other legal prerequisites were met.
Supreme Court ruling: Sales tax can be levied even with no physical presence
Unsurprisingly, the law was met with great resentment. Wayfair, Overstock.com and Newegg – all major online retailers with significant sales but without any physical commercial presence in South Dakota – appealed against it. In the case of Wayfair, the US Supreme Court has now reached a decision. In its ruling of June 21, 2018, it agreed with the state of South Dakota that the Commerce Clause of the US Constitution did not presuppose physical presence for there to be an obligation to pay sales tax. As its main reason, the Supreme Court stated that the interpretation of the Clause was no longer appropriate in the age of e-commerce.
A large number of federal states have already followed this ruling in their tax legislation, whereby the abovementioned criteria for sales or transaction volumes vary from state to state. The Supreme Court expressed its agreement with the idea of the “economic nexus” established by South Dakota, with the result that a similar threshold has been adopted by other states and the criterion of having actual business premises no longer applies.
Swiss companies: Ongoing review and analysis required
As far as Swiss companies are concerned, if they make sales in the USA and in doing so supply buyers who are considered end consumers for the purposes of American sales tax, it is important to check whether they exceed the abovementioned sales and transaction volumes for the “economic nexus” of the relevant federal state. Buyers not considered end consumers are generally resellers, for example (including wholesalers), as well as production companies who use the product in their manufacturing processes (with some exceptions).
For one thing, the existing double taxation treaty with the USA does not apply at federal state level, and what’s more, it does not cover sales tax. Only a few American states do not levy sales tax. Otherwise, where all the prerequisites apply, the sales tax should basically be paid within the federal state in which the buyer (in the sense of the end consumer) of the product is located. It is therefore important to carry out an analysis of sales flows in the USA and to identify the states in which the relevant economic nexus might be reached. Whether and how much sales tax needs to be paid is determined by the provisions of each individual state and the circumstances there.
Rödl & Partner USA is monitoring the further effects of the Wayfair ruling on an ongoing basis and is available to assist you with matters of American tax law in particular.
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