Online Business with No Physical Presence May Be Liable for US Sales Tax

In our previous article on the topic of sales tax in September 2018, titled “Understanding Sales Tax in the US” Click here to read the post, we discussed the ways in which US states themselves have taxing powers over sales where there is a sales tax nexus. The sales tax nexus is where your business has a substantial enough presence in a state for the state authorities to deem that you are taxable in such state. Now, however, companies that engage in online sales may be subject to tax obligations regardless of their sales tax nexus under the recent Supreme Court case, South Dakota v. Wayfair.

What happened in South Dakota v. Wayfair?

In South Dakota v. Wayfair, the state of South Dakota was suing Wayfair, an online retailer, for their failure to withhold and remit taxes on online sales inthe state.Wayfair argued against having to do so because under a prior Supreme Court decision, states could only apply sales tax on sellers with a sales tax nexus, which required some sort of physical presence. The Supreme Court decided it was time to take a hard look at this precedent as the growth of online retailers skyrocketed. In doing so, the Court held that states can now require online retailers to collect sales tax if certain revenue or quantity thresholds are met, regardless of whether they have a physical presence in the state.

What are the effects of South Dakota v. Wayfair?

Now, your business will need to withhold sales tax where the business:

  1. Has a sales tax nexus with the state; or
  2. Engages in online sales that meet the threshold level for the state (“Economic Nexus”).

This ruling primarily affects businesses with large eCommerce sales, Software as a Service sales, and digital goods/services sales. Additionally, for foreign companies who transact business in the US, this ruling may affect you even if you do not have a US permanent establishment.

What is the applicable state “threshold” for online sales?

A business will only need to comply with the ruling of South Dakota v. Wayfair if it reaches the particular state’s gross revenue or quantitative transaction threshold. The most popular gross revenue threshold utilized by states is $100,000 or more in in-state sales; whereas, the most popular state threshold based on the number of transactions is 200 in-state sales. It is critical that for each state you transact business in, you review their specific threshold requirements to ensure compliance.

I think my business meets the online sales threshold of a state, what next?

If your business has meets the online threshold of a particular state pursuant to the sales tax rules of such state, you will be required to register for a state sales tax permit and collect sales tax from all buyers in that state. The sales tax permit is obtained from the relevant state tax department.It is imperative that your business file sales tax in all jurisdictions where your business meets the threshold.

Upon receiving the sales tax permit you will be assigned a sales tax filing ‘frequency’ requiring sales tax filing to be made monthly, quarterly or annually. Again, each state has its own requirements and criteria in determining the filing frequency.

It is important to note that the process of determining whether your business is subject to the state sales tax and therefore is required to register for a sales tax permit, is of particular importance as failing to obtain a sales tax permit is deemed as criminal fraud.

How can CST help you?

Navigating through the sales tax rules can become an overwhelming process when trying to focus on the growth of your business in a new market. If you need assistance in analyzing whether your business has a sales tax nexus (physical and/or economical) in a state and whether you are required to be sales tax compliant, please don’t hesitate to get in contact with a member of our team.

US Market Entry Guide: Top 3 practical considerations when choosing between a Corporation and LLC

If you have a specific US market entry tax question please complete the ‘Have a tax question?’ form on the right hand of the page and subscribe to our mailing list. The first 100 subscribers will get a copy of our US Market Entry e-book!

Choosing between a corporation and a LLC is a difficult task because it requires business owners to trade off benefits.

To quote Simon Sinek, ‘you need to start with the why?’ What is your need? Are you setting up the entity because you have immediate needs like opening an office and employing local people, or are you setting up the entity to bill local customers?

Immediate need in many cases will trump tax planning because without revenue you have no tax and I cannot argue with that logic! If you fall into this category acknowledge this, get your entity formed, and accept there may be some expensive pain down the track when you are forced to restructure your business prior to a transaction.

Understand, what success looks like for you!  Are you building a global business to create long term cash flow or are you trying to create capital value that gives you an asset to sell. You can have start with the former and move to the latter but in our experience people tend to be focused on one or the other. Be real about your goals and make structural choices with this in mind.

Finally, think about your stakeholders (owners of the business). Where are they tax resident and what does the after tax return look like for them? Some choices may benefit stakeholders that are resident of country A more than those in country B. You need to ask yourself if that is ok? You need to be aware of the fact that a future buyer of your business may dictate the deal structure so you will want to be comfortable that the choice you make today will be the right one in 3, 5 or 10 years down the track.

So when other lawyers say that LLCs are better choices than corporations it is important that you understand the context of such a statement. Yes – they are simpler if you are solely considering US corporate law. Comparatively, there is nothing simple about an LLC taxed on a flow through basis that has owners in multiple countries whereas there is something inherently simple about owners based in multiple countries owning shares in a corporation that can retain profit.

Streamlined Offshore Procedures vs amended and delinquent filing

The IRS has announced that it will close the 2014 OVDP effective September 28, 2018. For taxpayers that have failed to disclose foreign financial assets and income, this limits avenues to coming into compliant with the U.S. tax requirements.

Clients with foreign holdings, financial assets and business holdings are often unaware of the stringent disclosure requirements in the US and it is very common for taxpayers to be entering into the various programs with the IRS to properly disclose financial assets.

Under certain circumstances and where a taxpayer was completely unaware of their disclosure and reporting requirements, this leaves the following options to get into compliance with IRS requirements:

c. Filing under the streamlined procedures; or

d. filing of delinquent FBARs and amended tax returns.

Streamlined procedures

The streamlined procedures include the streamlined domestic offshore procedures(SDOP) and streamlined foreign offshore procedures(SFOP). The streamlined domestic offshore procedure is available where a U.S. taxpayer does not meet the non-residency requirement contained in section 911 of the Internal Revenue Code (IRC) and is designed for U.S. taxpayers primarily residing in the U.S. The streamlined foreign offshore procedure is available where a U.S. taxpayer meets the non-residency requirement contained in section 911 of the IRC and is designed for U.S. taxpayers not living in the U.S.

The streamlined procedures require amending the last 3 years of tax returns to report undisclosed income from foreign assets, and filing FBAR disclosures for the last 6 years. The program also requires that a taxpayer files a statement to the satisfaction of the IRS that their noncompliance was non-willful. This is of particular importance as the taxpayer will do so under the penalty of perjury which can have criminal penalties. Making a fraudulent statement can carry substantial penalties and carry criminal charges.

In addition to payment of back-taxes, a miscellaneous offshore penalty of 5% is due under the SDOP. There is no miscellaneous penalty under the SFOP. The 5% penalty is on the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the 3-year tax return period and the 6-year FBAR period. For this purpose, the highest aggregate balance is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the covered years and selecting the highest aggregate balance from among those years.

As you can see, the streamlined procedures were designed for U.S. taxpayers that have non-willfully failed to disclose their foreign financial assets and foreign income.

Delinquent and amended filings

In certain circumstances, it can make more sense to file amended tax returns and delinquent FBARs outside of the streamlined procedures. This will generally be the case where you have foreign financial accounts that have not been disclosed, and where there is no additional income and therefore no further US tax liability.

In our experience, this may be the case where you have failed to disclose your superannuation on an FBAR, and you may need to include rental income from a foreign property in your U.S. tax return, however the property is generating losses.

Taxpayers should file delinquent FBARs if they do not need to use either the OVDP or the streamlined procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

  • have not filed an FBAR,
  • are not under a civil examination or a criminal investigation by the IRS, and
  • have not already been contacted by the IRS about the delinquent FBARs

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

The key requirement of filing delinquent FBARs is including a statement explaining why you are filing the FBARs late and that your failure to report is non-wilful. Willfulness has been defined by courts as “an intentional violation of a known legal duty”.

The IRS recommends that amended returns should be filed where a taxpayer has claimed the wrong filing status and has to change income, deductions or credits. This method is advisable where no further tax is due as you are able to disclose the correct income and information without penalties, tax and interest. To the extent further tax should be due upon amending the prior tax returns due to undisclosed income, you may not be able to file amended returns without penalties in which case the streamline process is advisable.

EXPATLAND Tokyo Launch

Click here to register

Australia Society Tokyo and The Australian and New Zealand Chamber of Commerce in Japan Cordially invite you to an evening of drinks and canapes with Australian cricketer Brad Hogg, Japanese rugby player Craig Wing and Expatland author John Marcarian to celebrate the launch of Expatland

  • Brad Hogg

    Australian International Cricketer

    Brad Hogg has been around the cricketing circles for more than 20 years and
    has always been in the discussion of the Australian team selection.

    First selected for a Test in 1996, Hogg waited seven years until his next
    chance but continued to apply his trade in the domestic ranks.

    His outwards poking tongue became his trademark as he spun his way into
    the new generation of Twenty20 cricket. Retiring from ODI and Tests in 2008,
    he focused solely on Twenty20 cricket, a surprise inclusion for the World T20
    in 2012 and 2014. In year 2015 and 2016 Brad played for the Kolkata Knight
    Riders at age 44.

    Brad has completed his 5th Big Bash season with the Perth Scorchers in
    2015/6 and looks set to play again in 2016/7.

  • Craig Wing

    Japanese Rugby Union player

    Craig Wing is a former Australian rugby league star and rugby union player in Japan for Kobelco Steelers and the Japan National Team. A former New South Wales State of Origin and Australian international utility player, Wing played for South Sydney Rabbitohs and Sydney Roosters throughout his decadent NRL career. He began his career in the NRL with the South Sydney Rabbitohs in 1998 in which he continuously impressed coaches and selectors around the nation. He was labelled as an agile, light-footed, try-scoring machine by his soon to be coach Ricky Stuart at the Sydney City Roosters
    In July 2009, Wing announced that he would be leaving the Rabbitohs to play rugby union in Japan and has proven to be an asset to the Japanese Rugby Union as he proves to be one of the strongest and most skilled players in the competition.
  • John Marcarian

    Author

    By his mid-teens John Marcarian had read his first book on international tax planning and was hooked. John has since become a chartered accountant, international tax advisor and the founder of the global business CST Tax Advisors. Throughout his youth John developed a keen interest in business, sport and travel. At the age of 25, although a tax manager with Deloitte, he recognised that starting his own business was the direction his professional career was headed. In 1992 John founded what is now CST Tax Advisors, and in 2004 he established its Singapore office. Since that time, CST Tax Advisors has spread to many global locations
    The company remains the only business that focuses solely on the tax needs of global expats living throughout ExpatlandTM. A regular speaker, John travels widely, presenting numerous technical and business papers around the globe to organisations such as the American Australian Association, AustCham Singapore, Israel-Asia Chamber of Commerce, and Australian Business (in London) to name a few. He has also assisted clients in more than 50 countries.

The event will be held at

Tuesday 19 July 2016
from 5:30pm to 8:30pm
at Oakwood Premier Tokyo Midtown.
Registration deadline: 10 July 2016

Click here to register

EXPATLAND AND CST TAX ADVISORS CHICAGO LAUNCH

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Featuring Guest Speakers Ian Chappel & Michael Holding

  • Ian Chappell

    Former Australian Cricket Captain

    When world cricket’s finest captains are discussed, Ian Chappell’s name is invariably among the front runners.

    The South Australian born right hand batsman captained Australia in 30 Tests between 1971 and 1975 and while he was in charge Australia didn’t lose a series. Ian Chappell made his Test debut against Pakistan in Melbourne in 1964 and played his final Test against England on the same ground 16 years later. He scored 5,345 runs at 42.42 in his 75 Test appearances, including 14 centuries, with a highest score of 196 against Pakistan in Adelaide in 1972.

    In Tests, his leg spinners returned him 20 wickets and his safe slips hands 105 catches.

    In the 262 first class matches he played for South Australia, Ian Chappell scored 19,680 runs, including 59 centuries, at 48.35, took 176 wickets and held 312 catches.

    With his playing days behind him, the 1976 Wisden Cricketer of the Year focused on a new career as a cricket commentator with the Nine Network and several overseas broadcasters and as a cricket writer. He has excelled at both.

  • Michael Holding

    Former West Indian Bowling Legend

    He was nicknamed Whispering Death by the umpires, the first part of the epithet came from his silent approach to the crease and the second, came from the end result of his run up. Never has cricket seen a combination of prodigious skill, athleticism and pure ruthlessness from a bowler.

    Basically a sprinter, Holding was born in Kingston, Jamaica in 1954. He used skills acquired from running 400 meter races which went on to have an effect on his run up.

    Because of his height, he was able to generate large amounts of bounce and zip off the pitch. Along with Garner, Roberts, Croft and Marshall, he formed a fearsome pace battery which terrorized batting lineups in the 70s and the 80s. Although he played only 60 Tests, he ended up picking 249 wickets at an average of 23.68 with 13 five wicket hauls and 2 ten wicket hauls. He holds the record for the best bowling figures in a match by a West Indian, 14/149 against England in 1976 at the Kennington Oval in London. He also has the record for scoring the maximum number of sixes (36) for a batsman with a run tally less than 1000.

    In May 2013, Holding received an Honorary Degree and Life Time Achievement Award at the University of East London for his immeasurable contribution towards sport.

    Currently, Holding is a widely respected commentator and critic who is known for his distinctive Jamaican accent and acerbic views.

The event will be held at

The Main Lounge
The Union League Club of Chicago
65 W Jackson Blvd, Chicago
On the 2nd June 2016 from 7pm onwards

Click here to register