Although there is no broad-based national consumption tax in the United States, 45 of the 50 states and the District of Columbia, as well as thousands of local jurisdictions, impose general retail sales taxes. For the twelve-month period ending in September 2020, sales taxes yielded USD 333 billion or 31.1 per cent of state tax revenues.
The US Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. dramatically expanded the US states’ power to require remote suppliers to collect taxes on in-bound sales to local consumers. The decision repudiated the pre-existing, judicially created constitutional rule limiting the states’ authority to enforce such collection obligations to those suppliers with an in-state physical presence, and replaced it with a ‘nexus’ rule based on ‘economic and virtual contacts’. The state legislatures reacted quickly and almost unanimously to the Wayfair decision by adopting rules imposing sales tax collection obligations on remote suppliers whose sales exceeded specified dollar or transaction thresholds. The states have imposed similar obligations on marketplace platforms that increasingly facilitate online cross-border sales.
In principle, these post-Wayfair tax collection obligations imposed on remote suppliers apply equally to interstate and international cross-border sales, and to domestic and foreign suppliers. As a practical matter, however, the states confront greater challenges in enforcing these obligations in the international context.
Under the US Constitution’s ‘Full Faith and Credit Clause’, judgments against domestic suppliers that fail to comply with a state’s tax collection obligations may be enforced against such suppliers in other states where the suppliers are located. By contrast, under the so-called ‘revenue rule’ that is widely respected in the international context, judgments against foreign suppliers generally may not be enforced in the foreign suppliers’ home jurisdiction.
Nevertheless, states have a variety of tools at their disposal to enforce or encourage tax collection by foreign suppliers, and there are other reasons why foreign suppliers may choose to comply with state collection requirements with respect to online sales. Consequently, Australian suppliers, along with other foreign suppliers, need to be cognisant of the mechanisms at the states’ disposal for enforcing the foreign suppliers’ state tax obligations and the possible consequences of failure to comply with these obligations.
The application of the states’ tax enforcement mechanisms and the risks of noncompliance by Australian suppliers may best be illustrated by a simple hypothetical example.
An example
Assume that an Australian supplier (AS) makes online sales into State A in excess of State A’s ‘distance selling’ threshold for incurring an obligation to collect tax on sales into State A, thresholds the US Supreme Court has effectively approved as constitutionally justified in Wayfair. Assume further that AS has no physical presence or assets in State A. Finally, assume that AS ignores its tax collection obligations under State A law and does not respond to collection or audit notices.
Although the State A tax authorities would be able to obtain a default judgment against AS in State A courts, if AS has no property in other US states, the default judgment would be of little value to the State A tax authorities. That is because of the ‘revenue rule’, mentioned above, under which ‘no country ever takes notice of the revenue law of another.’ Accordingly, unless the United States and Australia have entered into an agreement that overrides the revenue rule and recognises the countries’ respective tax judgments on a reciprocal basis, Australian courts will not recognise the State A court judgment against AS.
The United States is a signatory to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, under which countries generally agree to override the revenue rule and assist other countries with the recovery of their tax claims ‘as if they were its own tax claims’. However, in ratifying the Convention, the United States issued a ‘Reservation’ declining to comply with the mutual tax recovery provisions. Furthermore, although some US bilateral tax treaties agree to reciprocal enforcement of tax judgments, these provisions (like most provisions of US bilateral tax treaties, with the exception of the non-discrimination provision), apply only to national-level income taxes. Finally, insofar as states have adopted uniform legislation providing for recognition of foreign-country judgments in their courts with the hope that this will make it more likely that money judgments rendered in that state would be recognised in foreign countries, the legislation provides an exception for ‘a judgment for taxes’ (reflecting the revenue rule), although some states provide that recognition of foreign tax judgments is permissible but not required.
Consequently, US courts are unlikely to enforce tax judgments of foreign courts, and foreign courts are highly likely to respond in kind. In short, it is highly unlikely that State A tax authorities will be able to enforce a default judgment obtained in State A courts against AS in Australian courts.
However, this is not the end of the story for Australian suppliers.
What tools are available for US states?
Despite the limitation on mechanisms available to state tax authorities in enforcing tax obligations against foreign suppliers, states nevertheless have a variety of tools at their disposal to enforce or encourage tax collection by Australian suppliers. There are also other reasons why Australian suppliers may choose to comply.
First, although the hypothetical assumed (and still assumes) that the Australian suppler (AS) has no presence or assets in State A, if AS has assets in any of the other US states, then State A tax authorities would ordinarily be in position to enforce their claim against AS in other states.
In such a case, the State A tax authorities would file the default judgment obtained in State A courts against AS in a court in a state in which AS does have property, obtain a judgment under the Full Faith and Credit Clause (as implemented by the Uniform Enforcement of Foreign Judgments Act, which has been adopted by 49 states and the District of Columbia), and obtain a lien on AS property in that state.
In this connection, it is important to recognise that the Australian supplier, though organised and operating primarily outside the United States, may well have property in various US states. For example, it might have inventory on its way to customers in US distribution centers and US bank accounts or other financial assets in the hands of credit card companies, payment processors, and other financial intermediaries. Assuming, for example, that AS, the Australian supplier that made sales into State A in excess of the Wayfair threshold, failed to comply with its State A tax collection obligations, and had funds in a New York bank, State A can collect tax from AS by enforcing its judgment against the funds AS holds in a New York bank.
Indeed, in this connection it has been noted that the US Internal Revenue Service (IRS) requires payment processors to file a form ‘informing the IRS of payments made to vendors when the amount exceeds $20,000 and the vendor has engaged in more than 200 transactions’. The IRS routinely shares this information with the states, and once the state tax authorities obtain access to such information, they are in a position to assess tax on amounts due to the vendor from the payment processor.
Second, with the dominant role that a small number of marketplace platforms play in facilitating international cross-border online sales, most online sales by Australian suppliers are likely to involve such marketplaces. Moreover, there has been a strong and continuing trend in state legislation imposing tax collection obligations upon sales facilitated by marketplace platforms – obligations with which the large marketplaces are already complying and will almost certainly continue to do so in the future, especially if the states’ marketplace tax collection regimes are designed to be as simple and efficient as possible. In short, there is good reason to be optimistic about the prospects for enforcement of tax collection obligations with respect to foreign suppliers’ marketplace-facilitated sales.
Third, wholly apart from the Australian suppliers’ marketplace-facilitated sales, there may be reason to be hopeful about the prospects for foreign suppliers’ compliance with their obligations to collect tax on their direct sales into states where they exceed the states’ thresholds. As several observers have noted:
This is not just a matter of altruism, but good sense for the business and the individual managers. A large state tax liability will show up on financial statements and will hover over any future plans to operate in the United States. It seems improbable that large vendors are likely to ignore the laws of states in which they make substantial sales.
Finally, it may be worth addressing, at least in passing, the possibility that border controls (US Customs and Border Protection) might be able to assist the states in enforcing the foreign sellers’ state tax obligations with respect to sales of imported goods, just as such customs authorities have traditionally assisted in the collection of VAT/GST with respect to imported goods. The short answer, at least for the moment, which no doubt reflects the strong ‘federal’ tradition in the US and the respect for the ‘independence’ of the national and subnational governments’ respective tax regimes, is that the federal government provides minimal assistance to the states with respect to collection of state sales tax on imported goods.
The US. Customs and Border Protection’s website provides the following information:
Customs and Border Protection (CBP) does not collect state sales tax on goods imported into the U.S. However, CBP will make entries and CBP declarations available to state tax representatives if requested. Some states occasionally review these documents and send letters to importers and travelers notifying them that they owe state taxes.
Ongoing developments that continue to evolve
In conclusion, perhaps the most important observation one can make about the implications of recent developments in US state taxation of online cross border sales for Australian businesses is that these are ongoing developments that continue to evolve on a daily basis as part of the global response to the collection of VAT and GST on online sales. In short, Australian suppliers should follow the advice that the author frequently heard in his youth while listening to the radio: ‘Stay tuned.’
The blog is based on: Walter Hellerstein, ‘The rapidly evolving universe of US state taxation of cross-border online sales after South Dakota v Wayfair, Inc., and its implications for Australian businesses’, originally published in eJournal of Tax Research, vol. 18, no. 1, pp. 320-349, 2020.
Recent Comments