Implications of the Wayfair ruling for non-us multinational companies. A roundtable discussion

Transcription

1 Implications of the Wayfair ruling for non-us multinational companies A roundtable discussion

2 I m p l i c a t i o n s o f t h e W a y f a i r r u l i n g f o r n o n - U S m u l t i n a t i o n a l c o m p a n i e s : a r o u n d t a b l e d i s c u s s i o n On 21 June 2018, the U.S. Supreme Court issued its much anticipated ruling in South Dakota v. Wayfair, addressing the question of what constitutes nexus for US state and local sales and use tax purposes. In a 5-4 ruling, the Court voted to overturn 50 years of precedent, finding that the physical presence nexus standard articulated in two earlier opinions (Quill and National Bellas Hess) is [an] unsound and incorrect interpretation of the Court s previously dormant Commerce Clause jurisprudence. Importantly, the decision may be even more far-reaching as none of the Justices, including those joining in the dissenting opinion, appeared to continue to support the previous bright-line, Courtmandated physical presence standard. Welcome It is widely believed that, as a result of the Court s decision, states may now begin requiring all remote sellers (i.e., sellers such as those operating in the digital marketplace that do not maintain a place of business in a state) to register, collect and remit sales and use taxes on transactions with in-state customers regardless of the seller s physical presence provided they do so in a manner that does not otherwise violate the US Constitution by discriminating against, or imposing undue burdens on, interstate commerce. The ruling is likely to significantly impact companies outside of the US that sell goods or provide services directly to US customers (or via their US distributors). These businesses may be required to register for, collect and remit sales tax in US states, depending on how each individual state responds to the Court s ruling in Wayfair. Non-US companies should be aware that the states generally believe that the US international tax treaties do not apply to them and thus the permanent establishment provisions of those treaties offer non-us companies no protections (other than against discriminatory treatment). As such, non-us companies will be subject to the same economic nexus standards that apply to US domestic companies. Although enforcement by the states against non-us companies that do not have any contact with the US may be problematic in the short-term, if a state determines there was a tax collection responsibility and the non-us company failed to comply, since the non-us company did not file a return, the statute of limitations for assessment and enforcement will remain open indefinitely. Moreover, unlike for US federal income taxes, most states impose broad successor liability laws that are applicable to purchasers of the assets of a business that failed to collect sales tax that would have to be addressed through reserve accounting or considered by subsequent acquirers of foreign businesses that have not complied.

3 M i k e W o z n y k Mike is a principal with Ernst & Young LLP and based in the New York office, focusing primarily in multistate sales and use, excise and gross receipts. His 23 years of experience includes multistate audit management; training; compliance and reporting; research and planning; settlements; refund reviews; and transaction tax technology, which extend to manufacturing, construction, consumer products, retail and insurance industries. N a m r a t a V y a s Namrata is a US State and Local Tax Services senior manager based in London as part of the EMEIA Global Tax Desk Network. She has more than nine years of experience in the state and local tax field with experience in public accounting and with a state taxing authority. Namrata has practiced in the area of US state and local taxation in London since Prior to that, she was based in the Ernst & Young LLP New York City Office. Namrata has proven experience in US state and local tax matters relating to mergers and acquisitions, restructuring and planning, controversy, audit support, tax accounting and compliance support. M i c h a e l W a s s e r Michael is a senior manager in the Ernst & Young LLP National Indirect Tax Practice. He is a licensed attorney with more than 20 years of experience in the area of indirect state and local taxation. He has worked to shape tax policy both while serving in state government and in the private sector. Michael has served a variety of industries in assisting internal tax departments toward becoming perceived as opportunity centers for revenue generation through strategic tax planning, risk mitigation, refund reviews and process improvements. He leads the Ernst & Young LLP Sales and Use Tax Controversy Practice, thought leadership, restructuring team, and innovation efforts and regularly leverages his policy experience and numerous tax agency relationships across the country to assist our clients in proactively addressing state indirect tax issues. Implications of the Wayfair ruling for non-us multinational companies 1

4 M i k e W o z nour y k roundtable : topic today is Implications of the Wayfair ruling for non-us multinational companies. During our discussion we ll provide an overview of who is impacted by this decision and discuss some of the US tax basics as they relate to sales and use tax when compared with a value-added tax (VAT). We will also cover the issue of nexus, both before and after Wayfair, and what that might mean to you as a business, what we think the individual states may do, plus any additional implications. South Dakota v. Wayfair, Inc.: whom does the ruling impact? N a m r a t a V yi think a s : it s important to briefly discuss some US basic tax concepts and how they differ from global tax concepts. First, what is Nexus, exactly? Nexus is a sufficient contact with the state, which is required for a state to impose taxes. This has historically meant some sort of physical presence, for example, by employees residing or travelling to a state or by owning or leasing property in a state, such as maintaining an office location. The degree of contact between a taxpayer and the state to create Nexus can vary by state and also by the type of tax being imposed. US Constitutional restrictions on state taxing authority Non-US seller Goods/ services Non-US seller US subsidiary distributor/retailer Goods/ services Goods/ services US customer US customer Nexus Whether the taxpayer has sufficient contacts with the state to be subject to tax Constitutional limitations Due Process Clause Is it fair to impose tax? Minimum contacts no need to be physical Purposeful direction of its efforts toward a state to solicit business. Commerce Clause Does the state tax interfere with interstate commerce? Substantial nexus (historically required physical presence) Discrimination Apportioned (fairly) Fairly related Page 5 19 July 2018 Implications of the Wayfair ruling for non-us multinational companies Our first flowchart scenario (above) describes a non-us seller selling goods and/or services into the US, either to a US subsidiary distributor/retailer, who, in turn, ultimately sells at retail to the US customer. That non-us seller may be impacted and needs to consider the ramifications. The second is straightforward: A non-us seller selling directly to a US customer within the US. Goods or services, again, would be impacted. A third scenario that we don t have listed here, but I want to highlight is, a non-us seller using a marketplace provider to electronically solicit sales of products or services; that transaction or that business model would also be impacted and would need to be examined in light of this ruling. As a result, several industries and sectors will be significantly affected. These include: consumer retail, limited risk distributor structures, telecommunications, e-commerce and the provision of digital goods and services, including software-as-aservice. Page 9 19 July 2018 Implications of the Wayfair ruling for non-us multinational companies The two primary constitutional principles that restrict a state s authority to impose taxes. The first is the Due Process Clause which asks: Is it fair to impose the tax? The second is the Commerce Clause which asks: Does the imposition of the state tax discriminate against or interfere with interstate commerce? If the imposition of the tax satisfies either of these standards, then generally the courts, in interpreting the US Constitution, will not restrict a state s authority to impose the tax. The 50 states in the US are autonomous in tax jurisdiction with limited interference from the federal government, and localities and municipalities exist within the states that also sometimes impose additional taxes. All in all, there are thousands of jurisdictions that can impose various state and local taxes in addition to federal taxes. It s important to understand the difference between the state nexus standard described above and the concept of permanent establishment (PE) that is quite familiar in the context of international taxation. PE is a term used in bilateral tax treaties and its definition may vary. Although somewhat similar to nexus, PE is a much narrower concept. 2 Implications of the Wayfair ruling for non-us multinational companies

5 Consequently, it s actually possible, and in the internet age quite likely, for non-us taxpayers who have Nexus with a state to lack PE with the United States under the applicable bilateral tax treaty. While PE generally requires a fixed place of business such as an office, state nexus can exist without a fixed place of business in the state. Additionally, treaty protection is not available for sales tax purposes or any state tax purposes since the US generally restricts the PE concept only to the federal income tax, unless a state has either specifically or indirectly determined to conform to the applicable treaty in the administration of its taxes. In fact, in very few instances have the states done so in the context of their sales taxes. So if a company is claiming protection under a treaty for federal income tax purposes, that treaty protection does not automatically protect that company from various state and local taxes in the US. M i k e W a s suse e r taxes : in the US are generally levied against purchasers, and the recipient of a product or service, generally, is the party responsible for the tax. There are some exceptions to this, but that s the general rule. The caveat is that sellers who have nexus or taxable presence with the state have an obligation to actually collect the tax. They act as a trustee for the state and collect the tax from the purchasers and remit it to the applicable state. If they fail to uphold their collection obligations, they become jointly and severally liable for the failure to collect and remit that tax. If a business fails to collect, and if it has never filed a return, the statute of limitations in the US states will remain open indefinitely; they do not expire until filings have begun. So, a business could get audited years down the road, get assessed for tax, interest and penalties that can be quite substantial and that relate to years far back. That may present tremendous obstacles in terms of trying to recover that tax, after the fact, from customers who actually owed the tax but the seller had not collected it. When we analyze sales and use taxes, there s a very formalistic way to go about it. Six basic things must be considered. 1. What is the transaction (a sale, use, gift, lease, financing)? 2. What is the object of the transaction (sale of tangible personal property (TPP), service, realty, mixed)? 3. What is the tax base/taxable amount (discounts, deductions)? 4. Where does the transaction take place? 5. Is there some exemption available that applies to the transaction? 6. Who is responsible for collecting and paying the tax due? Basics of US Sales and Use Tax US Sales and Use Taxes (SUT) are generally levied against purchasers Sellers with nexus are obliged to act as trustees of the states in collecting the tax from purchaser Sellers become jointly and severably liable for failure to collect and remit the tax States often audit and assess sellers for failing to meet the collection obligation It is often difficult or impossible for a seller to recover the tax from customers years after the transaction occurred Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Generally, in the US, services that are associated with tangible property or real estate are frequently taxed. This can include repairs to tangible property, installation, that kind of thing, and then probably more relevant to this audience, cloud-based services, services that are provided remotely. M i k e W o z none y k : thing to highlight, in general, services are not subject to tax unless specifically enumerated by jurisdiction. From a trend perspective I think more and more states will start to re-evaluate their services and try to include them in their overall tax SUT base What part(s) of transaction to include for SUT Determining the sales price/value/etc. Discounts Many states include delivery or shipping charges Sales taxes historically focus on tangible personal property (TPP) transactions Many states now also tax digital goods accessed over the Web Policy trend: States looking to expand sales tax base Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Implications of the Wayfair ruling for non-us multinational companies 3

6 base, to gain that tax revenue. M i k e W a s sjust e r : a couple of final points: taxation of property used to perform services generally, that s treated as a tax on the consumption of property and only applies if that property is actually physically present in the state. Finally, for those services that have a multistate benefit like a multisite remote software licence for example, some states will allow for an allocation of the tax out to the various states from which that software is accessed, but the rules vary from state to state. N a m r a t a V yto a draw s : some differences between the VAT regime common outside the US and the US Sales and Use Tax (Taxes) regime, first off, there s the question of federal versus state imposition of the tax. VAT is generally imposed at the national level, whereas sales and use taxes are generally imposed at the sub-national or state and local level in the US. VAT rates are quite high compared to the US sales tax rates, with the standard EU VAT rate typically in a range of between SUT vs. VAT There is a uniform code for VAT in the EU, while there is no uniformity for US state sales and use tax purposes. Each state and local tax authority may impose sales and use tax as long as it does not violate the federal constitutional principles that we discussed earlier. However, 24 states have entered into a national Streamlined Sales and Use Tax Agreements, in which the joining states have attempted to create a single, national uniform tax base with uniformed sourcing rules and simplified tax rates. Out of these 24 states, 12 have enacted some type of economic nexus model that imposes sales tax collection duties on remote outof-state retailers when sales have risen above certain established thresholds. M i k e W a s sreviewing e r : nexus before and after Wayfair, there was the physical presence standard before, but things now change quite substantially. It is quite useful to look at the history, though, and you can see all the way back to 1967 when the physical presence concept first came into being at the U.S. Supreme Court. Nexus milestones Scope federal v. state VAT charged at national level (v. US at state level) Scope what goods/services taxable? Goods and Services (v. US mainly tangible personal property and designated services) Scope what levels of supply chain? Every level of supply chain (v. US on final consumption; resale exemption and use) Legislation uniform code? EU VAT legislation (v. US no central legislation; but voluntary effort at simplification/harmonization) February 1959 Northwestern States Portland Cement v. Minnesota September 1959 Pub. Law enacted 1960 Scripto v. Carson 1967 National Bellas Hess v. Illinois Dept. of Rev Complete Auto Transit v. Brady 1987 Tyler Pipe v. Washington Dept. of Rev Quill Corp. v. North Dakota and Wis. Dept. of Rev. v. Wrigley 1993 Geoffrey v. South Carolina (S.C. S.Ct.) 1999 J.C. Penney v. Johnson (Tenn. Ct. App.) 2003 Business Activity Tax (BAT) Bill first introduced in US Congress 2006 Lanco (N.J. S.Ct.) & MBNA (W.Va. S.Ct.) 2015 Alabama issues economic nexus regulations for sales tax purposes 2016 Crutchfield v. Testa (Ohio) (brightline nexus); S.D. SB Sales tax notice, marketplace providers, cookie nexus enacted 2018 South Dakota v. Wayfair US S. Ct. overturns Quill and Bellas Hess Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Page July 2018 Implications of the Wayfair ruling for non-us multinational companies 17% to 27%, while US state and local sales and use tax rates generally range from 4% to 10%. VAT is always imposed on both goods and services, whereas US state sales tax is mainly imposed on sales of tangible personal property and a few selected services. VAT is a multijurisdictional consumption tax imposed at each step in the production and distribution process, whereas sales and use tax is typically only levied at the point of final consumption. It became substantially more significant in 1992 when the Court basically articulated that the presence couldn t be diminutive, it had to be a fairly significant physical presence. The Court s ruling in Wayfair changes all of that, and, as a result, Quill and National Bellas Hess, the physical presence landmark cases that are overruled by Wayfair. A physical presence is no longer required for nexus to apply for state sales tax purposes. Many states already had very broad nexus statutes in place that said things like the state has authority to require compliance with their tax laws to the fullest extent permitted under the constitution. EY maintains a schedule 4 Implications of the Wayfair ruling for non-us multinational companies

7 of the states sales tax implementation plans with respect to an economic nexus standard, and anyone reading this can obtain it from their EY team. South Dakota v. Wayfair: background South Dakota v. Wayfair: majority opinion The Court focused on the practical economic effect and the continued viability of the physical presence standard It dismissed concerns that compliance costs would harm the market: Eventually, software will be available at a reasonable cost to lessen the burden on small sellers The Court found the protections in South Dakota s law (e.g., sales threshold, limits on retroactivity, Streamlined Sales Tax membership) were sufficient to limit the burdens on interstate commerce The Court did not opine directly on the constitutionality of the S.D. law: Remanded back to state courts The case involved a challenge to South Dakota law enacted in 2016 (SB 106) that requires remote sellers to register, collect, and remit sales tax as if they have a physical presence in the state if, in the previous calendar year, the seller either: Had more than $100,000 of gross revenue from delivery of tangible personal property, products transferred electronically or taxable services (collectively goods) into South Dakota Sold these goods for delivery into South Dakota in 200 or more separate transactions US Supreme Court Opinion issued 21 June 2018 Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Regarding Wayfair, the case involved a South Dakota law that was designed explicitly to test the physical presence standard in the US Supreme Court. It was fairly obvious at the outset that the state authorities promoting the law knew and intended for it to get overruled as unconstitutional at the state level and so it would eventually get sent up to the US Supreme Court. The terms of the South Dakota statute provided an economic standard whereby any seller receiving $100,000 of gross revenue from the sale and delivery of taxable products or services into the state, or who entered into 200 or more separate transactions with customers in the state within a one-year period (irrespective of the dollar value of those transactions), would create Nexus. The transactional threshold amount is very significant because many companies may have very small transactions, just a few dollars per transaction but, if they have 200 or more, they d have Nexus under the statute, so it s a very low standard and it s easy to see that it s not hard to cross that threshold. That s why this implicates so many different companies. And then, of course, the US Supreme Court decision in Wayfair was issued on 21 June 2018, so, as of that date, going forward, that physical presence standard is obsolete and we must all act under the new regime. The Court, in fact, did not directly opine on whether South Dakota s law actually met the US Commerce Clause constitutional standards. In fact, they deferred the ultimate resolution of those facts to the lower state courts. Nevertheless, by the very words of the opinion, the Court implied that the South Dakota law likely does satisfy the Commerce Clause because of some of the simplification measures that South Dakota had adopted. Further, because the Court did not directly opine on the constitutionality of that law, it s important also to note that the litigation in the underlying case is not over, as they remanded the case back to the South Dakota Supreme Court to make the final determination as to whether or not South Dakota s law would comport with US Commerce Clause requirements. [Note: Subsequent to the ruling in Wayfair, the South Dakota legislature adopted a subsequent statute that effectively worked to override the universal stay of enforcement of the statute for all except the taxpayers joined in the Wayfair case.] M i k e W o z nto y k recap, : states are definitely already taking notice of the South Dakota rules and are amending their own laws accordingly. I would estimate that in excess of 70% of the companies we looked at that had taken a position that they did not have any taxable presence in the US, even under the prior physical presence standard, actually wind up having a physical presence and associated risk, largely due to one of several factors such as an affiliate relationship, some kind of a click-through arrangement or affiliation through a marketplace. Implications of the Wayfair ruling for non-us multinational companies 5

8 Current state nexus landscape substantially similar in that they set an economic threshold. These bills could potentially be resurrected. Click through Affiliate Economic nexus Notice/ reporting Enacted: Arkansas, California, Connecticut, Georgia, Idaho (2018), Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Tennessee, Vermont, Washington Enacted: Arkansas, California, Colorado, Georgia, Illinois, Iowa, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New York, Oklahoma, Puerto Rico, South Dakota, Utah, West Virginia, Wisconsin Enacted: Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Louisiana*, Maine, Massachusetts, Mississippi, North Dakota*, Ohio, Rhode Island, South Dakota, Vermont*, Washington, Wyoming Enacted: Alabama, Colorado, Connecticut (state asserting), Georgia, Kentucky, Louisiana, Pennsylvania, Puerto Rico, Rhode Island, Tennessee, Vermont, Washington Next, and topmost of mind, is the question of how the states will go about enforcing these collection obligations against non-us companies that have no physical presence in the US. As there is no permanent establishment threshold for state-level US sales and use taxes, states can legitimately now, under Wayfair, impose their collection remittance filing requirements on non-us businesses selling to US customers. But that in turn raises the question of whether the foreign Commerce Clause allows states to subject the companies to the same nexus standards as US domestic companies. Marketplace provider Cookie/ app Page July 2018 Implications of the Wayfair ruling for non-us multinational companies So it is very important to look at those kinds of issues, and we expect there may be opportunities for affected taxpayers to enter into statesponsored amnesty programs or voluntary disclosure agreements in the future in order to mitigate state tax risk. This is just one more reason why companies should stay connected with this rapidly evolving issue. M i k e W o z nlet s y k : talk about a few of the additional implications. One burning question is whether the US Congress will interject itself in this area and do anything. I think it s fair to say that the answer is unknown. Last year, there were two bills circulating, the Marketplace Fairness Act and the Remote Transactions Parity Act, both Implications: sales and use taxes Enacted: Alabama, Connecticut, Kentucky*, Iowa, Massachusetts, Minnesota, Oklahoma, Pennsylvania, Rhode Island, Washington Enacted: Iowa, Massachusetts, Ohio, Rhode Island Will Congress act? What are the considerations for foreign companies? Remember, US income tax treaty permanent establishment provisions do not apply to the states (only non-discrimination) Does Foreign Commerce Clause allow states to subject foreign companies to same nexus standards as US domestic companies? What are the considerations for local sales tax? 12,000 US sales tax jurisdictions Will there be increased audit activity/litigation? Is there a small business exception? What s an undue burden now? Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Enacted in 2018 * Contingent effective date There can be a legitimate determination that a state can execute a judgement against a foreign-based company selling to US customers. However, there is also a legitimate question as to whether, and to what extent, they re going to be able to enforce that through the courts. There are some practical considerations to think about. I think there s generally a pretty high risk to companies of relying on a state s inability to enforce such judgements. There are some practical risks that exist today that warrant taking a hard look at whether or not you should comply. First of all, it is a pass-through tax that you have the ability to collect from your customers, it is not a tax on sellers. So, the primary burden is just actually undertaking that collection and remittance task in-hand. As we mentioned, the statute of limitations does not run (or run out) if you do not file. So 8% of your entire US revenue will accumulate, with compounding penalties and interest over the years, and that s never going to go away, even if you feel that the state can t enforce it in court. It also has some significant implications for mergers and acquisitions. Let s say, five years later, you either create an affiliation or a financial relationship or something in the US, which allows them to reach you. Now you ve got this accumulated liability, which you could have passed through to customers, that you ll never be able to recover and it is now yours and, potentially, that of anyone interested in buying your company. So, it s a very, very significant risk, with significant implications, especially if you re ever interested in being acquired by a company that has any presence in the US. That can trigger all of that exposure and it could make it difficult to get a deal like that closed. It also has International Financial Reporting Standards (IFRS) implications, potentially. From a US perspective, we ve generally concluded that it s not a probable liability that it will go retroactive, but it does need to be examined, and you should certainly consult with auditors as to that question. 6 Implications of the Wayfair ruling for non-us multinational companies

9 Another consideration I d mention is that, in the Wayfair decision itself, the Court pointed out that there are more than 12,000 US sales tax jurisdictions, many of them local. The majority of them are administered at the state level, but some local jurisdictions administer their sales and use taxes separately from their state, so there would be a separate filing obligation. Will there be increased audit activity litigation? You can count on it. There is no set standard now, there s no bright-line as to what constitutes economic nexus. We ll have to wait and see what the outcome of the remand of the Wayfair case to the South Dakota courts is and a final ruling there may provide some clarity. And if Congress decides to step in to create a bright-line standard, that may help. N a m r a t a V yanother a s : consideration is that the impact of this ruling may well go far beyond sales tax. There could be ramifications for income taxes, for gross receipts taxes and for payroll taxes. And, while it s not a free-for-all yet, we do know that there are some constitutional restrictions on state governments to not impose taxes that discriminate against commerce or place undue burden on commerce. So those are in-place, but, based on the Wayfair decision, we know that the states feel emboldened to enact some kind of economic or factor presence nexus standard. A factor presence is similar to a threshold that we discussed for sales tax. A factor presence would be based on something, for example, like $500,000 of revenue in state, or 500 state customers or $50,000 of property that could create nexus and income tax filing obligations. The states are not generally going to go that route, but we do know that there are some restrictions that are still available, so states may have to still adhere to that. Implications: other state and local taxes One such restriction is a federal law commonly referred to as Public Law This federal law restricts the state s ability to impose income taxes on businesses that limit their activities in the states to certain, specified sales solicitation activities for the sale of tangible personal property. For example, if a company is selling tangible property into the state and its connection to the state is limited to the permissible sales solicitation activities described in the federal law, the goods are shipped from a location outside of the state and the orders are accepted from outside the state, the state is barred from imposing a net income tax on that entity. I should emphasise, however, that this federal law only provides protection against the imposition of a net income tax, including personal or corporate income tax. Sellers of services are not protected by this provision nor are businesses able to claim exception from the application of other non-income taxes such a gross receipts taxes or sales taxes and so on. Moreover, in applying Public Law , some states, such as California, have specifically stated it is only available to domestic companies and does not apply to foreign companies. So businesses might have to reconsider whether they re now liable for state income taxes in the states where they do business, but don t have physical presence. Businesses such as financial services that generally operate in a limited nexus capacity may now have to reassess because of this possible new economic or factor presence standards, to see if they have increased compliance requirements for income tax purposes or any other state tax purposes. M i k e W o z nso y k what : do taxpayers need to do next? First of all, who Who is affected? Everyone! New US Constitutional nexus standard may cause states to revisit current jurisdictional standards/apply all state taxes more broadly Some states never ruled on the applicability of the physical presence nexus standard to their state taxes A growing number of states have implemented bright-line factor/economic presence doing business standards for purposes of applying their state income taxes States may more aggressively impose tax on a non-resident entity s income derived solely based upon sales to customers in the state Expect more states to adopt/expand bright-line factor/economic presence doing business standards Federal law (P.L ) still pre-empts imposition of state net income taxes No current threat to repeal (or for that matter, expand) application of this federal law P.L is a federal law that prohibits a state from imposing a tax based on net income if the activity in the state is limited to certain specified sales solicitation activities with respect to the sale of tangible goods and orders are accepted and fulfilled from outside of the state. Some states have interpreted P.L to not apply to foreign companies (e.g., California). Remote sellers: Need to evaluate and, as necessary, upgrade existing internal compliance systems Remote buyers: Need to assess use tax accrual and exemption certificate procedures Marketplace sellers: Need to assess impact on state efforts to target small sellers operating through online marketplaces Marketplace providers: Need to determine interplay between state laws requiring marketplace providers to collect tax and small seller exemptions Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Page July 2018 Implications of the Wayfair ruling for non-us multinational companies Implications of the Wayfair ruling for non-us multinational companies 7

10 is affected? The answer is any remote seller, anyone that is in the business of selling tangible personal property and/or services into the US, whether you re a seller, if you re a marketplace seller or you re actually using a marketplace provider. Again, all will be impacted. As for remote buyers, as a result of Wayfair, the impact will be that you re going to have US companies and foreign companies, potentially charging sales tax on your purchases, going forward. What are some of the key actions for companies to take? Ideally, what you need to do is analyze your current structure as it relates to your business model, evaluate the entire business model life cycle, understand what are you selling, how are you selling it and who you re selling it to. From there, based on your sales activities into US jurisdictions, as a first action you should determine the appropriate legal standing of the entities engaging in such business. Key actions: doing nothing is not an option! Analyze and assess their legal standing in various states Review compliance policy, processes and systems to assess gaps: Filing footprint Taxability decisions Exemption certificate management Use tax accrual ASC 450 review/ias 37 (IFRS) Review existing systems for determination and reporting: Assess need for implementing a new system or updating the existing ones Assess whether outsourcing is a better and more immediate option Assess options available through Streamlined Sales Tax (SST) Page July 2018 Implications of the Wayfair ruling for non-us multinational companies have to make sure that you have a robust process in place, including having the systems to effectively charge tax, collect it, and perhaps even more importantly, remit it to the various jurisdictions. There are many considerations here; what if you are selling product to a manufacturer that s exempt? There may not be a tax obligation for you to collect, but you may have to maintain exemption certificates. M i k e W o z : na y lot k of our multinational and foreign company clients are analyzing their billing capabilities, which, in turn, will allow them to charge the appropriate tax and then collect it. The final step is compliance; you may have to be registered in various jurisdictions, and with that comes the burden of filing either sales tax returns on a monthly, quarterly or annual basis. So, that s a significant consideration, whether you do that in-house or externally. M i k e W a s si ve e r been : asked the following question more than once since the Court issued its decision: Does Wayfair only apply to online sellers? The short answer is: No. It applies across the board, so any non-nexus seller that s making a sale of goods or taxable services into the US would be implicated. M i k e W o z nso y k there : are implications whether you re selling from the UK, directly to the end user in the US, selling through a US distributor or retailer into the US, or if you re using a marketplace provider in the US, or even outside the US making sales into the US. This is why it s important to really document your business model from where you are and what you re selling and where you re selling into. M i k e W o z nit s y k also : important to remember that jurisdictions can go back and analyze the date the first sale appeared or occurred. So again, that really needs to be evaluated when you go through your exercise and determine what states you have sales in and more importantly, the magnitude of the sales. So all in all, it s a situation with a lot of questions and a lot of detail, but clearly the way to go about this is to establish a framework process to follow The second action will be to identify what you are selling. You should ask whether it s the sale of a good or of a service, and more importantly, how will that sale be treated for state sales tax purposes? You also should ask whether any exemptions apply? As previously mentioned services are typically not taxable unless those services are specifically enumerated as taxable by the jurisdiction. So again, you have to go through that whole process to analyze what are you selling, who is your customer and whether it taxable or not. So, again, reviewing the entire business model, looking at your processes and, more importantly, your systems, is a huge component to this scenario. Now, if you have to be registered and filing in US jurisdictions, you 8 Implications of the Wayfair ruling for non-us multinational companies

11 N o t e s Implications of the Wayfair ruling for non-us multinational companies 9

12 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved EYG no Gbl ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com