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Caveat venditor:
The implications of
Wayfair for US
inbounds
Tuesday, November 13, 2018
10:00-11:00 am ET
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3Caveat venditor:
The implications of
Wayfair for US
inbounds
Tuesday, November 13, 2018
10:00-11:00 am ET
Please disable pop-up
blocking software before
viewing this webcastSpeakers
Mark Arrigo Jamie Yesnowitz David Sites Metisse Lutz
National Managing Principal – SALT – National Managing Senior Manager – SALT
Partner – SALT WNTO Leader Partner – International
Tax
5Learning objectives
Demonstrate knowledge of the implications
1
of the Wayfair decision
Demonstrate the implications of the Wayfair
2 decision
6Agenda
International Tax Consideration of Inbound
1 Companies, Post-Wayfair
2 State Developments On Wayfair This Fall
3 The Deeper Dive into Effects on Foreign Sellers
4 What Should Foreign Sellers Be Watching For?
7International tax considerations of
inbound companies post-Wayfair
8Inbound direct taxation - in short
• Focus is activities of FOREIGN PERSON
• Statutory Law – U.S. Trade or Business/Effectively Connected Income
• Income Tax Treaties - Permanent Establishment and Business Profits
• Treaties are generally limited to "Income Tax"
• States not bound by treaties
• Many foreign sellers historically have avoided income taxation and sales tax
nexus by avoiding physical presence with the U.S.
9Inbound distribution paradigms
Foreign Direct Sellers Foreign owned US Distributor
• Sells goods or services directly to • Foreign Parent (FP) owns US
US consumers distributor
• No other physical presence in the • FP sells goods to US distributor for
United States sale to US customers
• Customers sourced online or • FP has no other presence in the
through other advertising, for United States for foreign parent
example • US distributor handles US sales and
marketing etc.
10Inbound distribution paradigms
Foreign Wholesaler Foreign Seller with U.S. Business
• Sells goods or services directly to • Foreign Parent (FP) conducts business
unrelated distributors in the United States
• No other physical presence in the United • FP sells goods directly to consumers
States and wholesalers
• Customers sourced online or through • FP is subject to US federal income tax
other advertising, for example
11Inbound distribution paradigms
Other complicating structures/issues
• Digital delivery and online access (e.g. SaaS, Streaming Video)
• Use of "marketplaces" for product sales
• Global procurement contracts
• Transaction characterization
12Global digital taxation developments
• India – Equalization Levy (Feb 2016)
• UK Digital Tax Proposal (Oct 2018)
• EU Digital Tax (March 2018)
• BEPS – Action
What does all of this mean in light of Wayfair?
13Foreign sellers – What do I need to think
about?
• Consider quantum of sales of goods/services to U.S. customers
• Disaggregate sales data by state to determine most significant
exposure states
• Evaluate state law for particular transaction – how are my
transactions viewed?
• Consider whether transactions are subject to tax or if any other
exemption may apply (re-sale etc.)
• Do I need to restructure transactions or parties to transactions to
avoid unintended consequences of Wayfair?
14Polling question #1
How prepared is your organization address the
international impacts of Wayfair?
A. We have addressed it!
B. Pretty far down the road, feeling good.
C. We've thought about it but don't have a full picture .
D. We have not meaningfully considered it .
15State developments on Wayfair
16State developments on Wayfair
For those new to Wayfair, here’s the history:
• Remote sellers historically were not subject to sales and use tax filing
obligations because of lack of physical presence
• Many states challenged the status quo by enacting laws that stretched the
definition of physical presence
• South Dakota went a step further and enacted an economic nexus statute
that was immediately challenged by affected businesses
• In Wayfair, the U.S. Supreme Court endorsed the South Dakota statute by
finding that physical presence was not necessary for a state to impose
collection and remittance obligations on remote sellers
• States have been responding ever since, with significant uncertainty for
businesses, especially foreign sellers
17State developments on Wayfair
For those who attended our last webcast on the topic in early
September – what’s happened in the last two months?
• Varied responses through legislation and other guidance continues
• Similar inconsistency in governing definitions for purposes of thresholds
• Majority of states using the South Dakota economic nexus thresholds, but
perhaps the start of a move away from using the transactional threshold
• More states are leaning towards imposing obligations on marketplace
facilitators / providers as well as remote sellers, with an open question as to
whether doing so comports with Wayfair
• Most importantly: a lot of states have gone live with economic nexus
provisions, as October 1 and November 1 starting dates have passed
18State developments on Wayfair
Significant state activity since early September:
• California – several proposals, with potential debate to come on whether to
use South Dakota style-thresholds, or higher economic nexus thresholds
• New Jersey -- extensive legislation on remote sellers became effective on
November 1, 2018, with additional provisions for marketplace facilitators
• Texas – proposal to use $500,000 economic nexus threshold standard
• Virginia – executive branch proposal to use South Dakota-style thresholds
• West Virginia – department policy to enforce South Dakota-style thresholds
on January 1, 2019
• Wyoming – department policy to enforce South Dakota-style thresholds on
February 1, 2019
19State developments on Wayfair
Significant state activity since early September:
• South Dakota
• The state that started it all finally resolved the underlying litigation, and
enacted additional legislation
• The U.S. Supreme Court did not resolve the Wayfair case, and instead,
remanded the case back to the lower South Dakota court to address
additional potential constitutional arguments
• At the same time, South Dakota enacted remote seller and marketplace
provider legislation, generally applicable starting November 1, 2018
• The state and the litigants ultimately settled Wayfair, and as part of the
settlement agreement, the litigants will not have to collect or remit
sales/use tax to South Dakota until January 1, 2019
20Polling question #2
Of the recent developments just discussed, which state’s
proposed action on economic nexus standards, if enacted,
will have the most impact on your business?
A. California
B. Texas
C. Virginia
D. None of these provisions will have any appreciable effect on our business
21The deeper dive into effects on foreign
sellers
22The deeper dive into effects on foreign
sellers
Let’s start with the shallow dive – what did we recognize as issues on the
foreign seller side a couple months ago?
• Relative lack of treaty and constitutional protections
• Monitoring sales and transactions into individual states is necessary
• Need for automation and compliance tools
• Changes in the way that foreign sellers will do business in US
• State methods of enforcing compliance from foreign sellers
• Foreign sellers will have to consider remediation, voluntary disclosure and
prospective compliance
• Additional income tax implications, which could result in exposure
23The deeper dive into effects on foreign
sellers
On to the deeper dive – starting with foreign sellers’ relative lack of treaty and
constitutional protections
• Treaty protections that cover federal income taxation often do not extend to
state taxes, so claiming treaty protection if a state required a foreign seller to
collect and remit sales tax likely would not work
• Additional Constitutional protections against taxing foreign businesses (the
Japan Line jurisprudence) may not be applicable in the context of requiring
collection / remittance of sales taxes on inbound transactions
• Wayfair very well could put foreign businesses on par with remote sellers in
the US – subject to collection / remittance of sales tax to the states, even
though they may not be cognizant that changes have occurred recently
24The deeper dive into effects on foreign
sellers
Monitoring sales and transactions into each state
• Monitoring sales and transactions into individual states is necessary to see if
the market and transactional thresholds are reached
• In many cases, foreign sellers will not reach these thresholds in all states
• But beware the transactional threshold amount – 200 transactions for a
product that costs $25 each means that $5,000 of economic activity is
enough to require compliance (a lot lower than a $100,000 market threshold)
• If the thresholds are reached, the foreign seller has to know how to determine
whether its sales are subject to sales tax, and if so, how to remit the collected
funds to the states
• Need automation and compliance tools to complete accurately and efficiently
25The deeper dive into effects on foreign
sellers
Changes in the way that foreign sellers will do business in the US
• Using agents or representatives to avoid sales tax obligations is not going to
work post-Wayfair
• Following Wayfair, physical presence still matters, so for foreign sellers that
may not meet the new economic nexus thresholds, having just a little
physical presence in a state is still enough to be subject to sales tax
obligations in that state – so tracking physical activity in the states is still
important
• May be advisable to re-evaluate what type of presence a foreign seller has
into the US, and perhaps it’s the right time to expand US footprint as a means
to increase its US market
26The deeper dive into effects on foreign
sellers
How will states enforce compliance from foreign sellers?
• States are likely to look for the foreign businesses that either have related
entities located in the US, have very large inbound markets, and/or have filed
state income tax returns
• Expectation that other countries will want to treat US sellers to outbound
markets in the same manner
• Sellers might want to comply for a variety of reasons:
• If they want to capture more of the US market, they will comply
• Foreign sellers with US interests may already have capacity to comply
• Foreign sellers that want to purchase interests in the US will need to
comply in some manner to survive the due diligence process that
businesses perform prior to a merger / acquisition
27The deeper dive into effects on foreign
sellers
Considering remediation through voluntary disclosure
• For foreign sellers whose past activities may have resulted in nexus based on
physical presence, or based on agency / affiliate / click-through relationships,
sales tax exposure may exist, requiring remediation efforts
• Remediation can be done through the voluntary disclosure process, allowing
for businesses to voluntarily come forward to report liability, in exchange for a
limited lookback period and waiver of penalties (and in some cases interest)
• Of course, voluntary disclosure is conditioned upon future compliance,
requiring registration, and then proper collection / remittance of sales tax in
the future
• Before proceeding, an estimation of existing exposure is a necessary step
28Polling question #3
Has your business engaged in the voluntary disclosure
process with states on sales tax matters in the past three
years?
A. Yes, a lot (more than 10 states)
B. Yes, in a few states
C. Yes, in one state
D. No, we have not engaged in the voluntary disclosure process with states
29The deeper dive into effects on foreign
sellers
Additional income tax implications and potential exposure
• Wayfair confirmed that states could go beyond physical presence nexus for
purposes of the sales tax, and by implication, confirmed the same for
purposes of state income taxes
• Many companies, including foreign businesses, had concluded that physical
presence was necessary to be subject to an income tax, in contrast to many
states’ policies
• Wayfair changed the game – and as a result, states potentially can come
after noncompliant businesses and assess income tax retroactively
• Assessing potential tax liability is a must, along with considering remediation
through voluntary disclosure
• Will reserves be required under international financial regulatory standards?
30What should foreign sellers watch for?
The continuing specter of Congressional action looms
• Now that midterm elections have passed, we now generally know what the next
Congress will look like
• With Democratic takeover of House and continued Republican Senate, potential
exists for significant gridlock over the next two years
• But there’s a lame-duck session that will be taking place in Washington in the next
few weeks, so a window to enact legislation this year still exists
• There have been many efforts by Congress to try and come up with a uniform
nexus standard for the states, with no success to date
• A current example is the Online Sales Simplicity and Small Business Relief Act of
2018, which would require states to enter into a sales tax compact before requiring
remote sellers with at least $10 million in gross national sales to collect and remit
sales tax to the states
31What should foreign sellers watch for?
The states will keep addressing Wayfair issues in 2019
• States by and large will continue to enact legislation that conforms to the
South Dakota economic nexus standards, with potential for some of the
larger states to put in relatively higher thresholds
• We have not seen any widespread activity by the states to specifically reach
out to foreign sellers on a proactive basis, but when a high-profile foreign
seller is targeted by the states, one would expect additional activity to follow
• No litigation to speak of yet that directly implicates Wayfair principles, but
nexus fights are not over yet (Alabama Scholastic case as an example)
• Marketplace provider / facilitator legislation could be ripe for challenge
• Potential for more states to adopt formal economic nexus provisions for
income tax purposes
32Polling question #4
Based on what has developed since Wayfair, what is your
business most concerned about at this point?
A. Figuring out a way to track and comply with the new, non-uniform remote
seller rules
B. Assessing how much income tax exposure might exist
C. Determining whether our business is considered a marketplace facilitator /
provider, and subject to the new state legislation targeting these activities
D. Nothing in particular – this seems pretty straightforward
33Questions?
34Speakers
Mark Arrigo Jamie Yesnowitz David Sites Metisse Lutz
National Managing Principal – SALT – National Managing Senior Manager – SALT
Partner – SALT WNTO Leader Partner – International
Tax
35Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser.
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