Caveat venditor: The implications of Wayfair for US inbounds

Transcription

1 Caveat venditor: The implications of Wayfair for US inbounds Tuesday, November 13, :00-11:00 am ET We will be starting soon Please disable pop-up blocking software before viewing this webcast

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4 Caveat venditor: The implications of Wayfair for US inbounds Tuesday, November 13, :00-11:00 am ET Please disable pop-up blocking software before viewing this webcast

5 Speakers Mark Arrigo National Managing Partner SALT Jamie Yesnowitz Principal SALT WNTO Leader David Sites National Managing Partner International Metisse Lutz Senior Manager SALT Tax 5

6 Learning objectives 1 Demonstrate knowledge of the implications of the Wayfair decision 2 Demonstrate the implications of the Wayfair decision 6

7 Agenda 1 International Tax Consideration of Inbound 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? 7

8 International tax considerations of inbound companies post-wayfair 8

9 Inbound 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. 9

10 Inbound distribution paradigms Foreign Direct Sellers Foreign owned US Distributor Sells goods or services directly to US consumers No other physical presence in the United States Customers sourced online or through other advertising, for example Foreign Parent (FP) owns US distributor FP sells goods to US distributor for sale to US customers FP has no other presence in the United States for foreign parent US distributor handles US sales and marketing etc. 10

11 Inbound distribution paradigms Foreign Wholesaler Foreign Seller with U.S. Business Sells goods or services directly to unrelated distributors No other physical presence in the United States Customers sourced online or through other advertising, for example Foreign Parent (FP) conducts business in the United States FP sells goods directly to consumers and wholesalers FP is subject to US federal income tax 11

12 Inbound 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 12

13 Global 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? 13

14 Foreign 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? 14

15 Polling 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. 15

16 State developments on Wayfair 16

17 State 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 17

18 State 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 18

19 State 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,

20 State 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,

21 Polling 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 21

22 The deeper dive into effects on foreign sellers 22

23 The 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 23

24 The 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 24

25 The 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 25

26 The 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 26

27 The 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 27

28 The 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 28

29 Polling 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 29

30 The 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? 30

31 What 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 31

32 What 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 32

33 Polling 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 33

34 Questions? 34

35 Speakers Mark Arrigo National Managing Partner SALT Jamie Yesnowitz Principal SALT WNTO Leader David Sites National Managing Partner International Metisse Lutz Senior Manager SALT Tax 35

36 Disclaimer 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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