Trading in the USA: is it physical or not?

Historically in the USA, it has been necessary for businesses to have a physical presence in a state before the state can impose an obligation on the business to operate a sales tax. Sales tax is broadly the equivalent to UK VAT and is determined by each state independently.

As a direct challenge to this rule, South Dakota enacted an economic presence nexus statue for sales tax in 2016.  This statue forced remote sellers to operate sales tax in the state if their sales in the state exceed $100,000 or they have more than 200 separate sales transactions in the state. This proved unpopular with many internet retailers and was considered unjust.

Wayfair Inc. was one of the companies that challenged this new law in court in 2018. The Courts ultimately ruled that the old physical presence rules were an incorrect interpretation of US law and that the new laws created by South Dakota were in line with the substantial nexus requirement.

It was concluded that the physical presence rule is flawed as it imposes on a state’s sovereign taxing authority. It allowed remote sellers to take advantage of the benefits of a state’s market without sharing its burden of tax collection.

Impact on international trading

The decision of this case will have wide-reaching ramifications.  Many other states are enacting similar laws to require sellers without a physical presence to charge sales tax.

Although the case involved internet sellers, the result of the case is likely to impact remote sellers, service providers, licensors of software, and other businesses that have provided services to, or delivered their products to customers from a remote location.

If a UK business is trading in the US without a physical presence it will now need to consider whether and how they need to comply with local sales tax rules. As sales tax is determined on a state by state basis, which are each free to determine the rates and trading requirements, it may be complex to determine what the requirements are.

The case could also lead to future developments resulting in even more online retailers being caught and it is therefore important to keep up to date with any changes if you are trading in the USA.

We would stress that non-US companies should not rely on double tax treaties to eliminate all these liabilities. Specific professional advice should be taken.

How we can help

As a member of Baker Tilly International, MHA Carpenter Box is able to advise UK businesses on the right decisions when structuring their international operations and meeting the overseas tax compliance obligations that arise. Our international tax team has significant experience in working with a wide range of diverse businesses in territories all over the world.

If you do conduct any substantial trading in the USA and would like to discuss the potential impact of these rules further, please get in touch with a member of our tax team on 01903 234094.