The high court ruled that online retailers must collect state sales tax from consumers but the international implications of this are unclear.
The rise of e-commerce globally is exponential. In 2017 in the US alone, e-commerce grew by 17%. However, a recent ruling by the US Supreme Court is set to disrupt this burgeoning market by leveling the playing field for both traditional sellers and online retailers when it comes to taxation.
The Supreme Court recently overturned previous court decisions that enabled “out of state” merchants to avoid collecting sales tax in states where they lacked a physical presence. The decision means that states can now impose a sales tax on goods sold by online retailers, regardless of their physical location.
Non-US based companies that sell to US customers will be impacted by the decision, according to Nancy Manzano, a director in the Chief Tax Office at Vertex, a leading provider of tax technology. In addition, Manzano says the new legal and commercial landscape is likely to pressure other governments to follow the US’s lead. “This decision has the potential to affect not only US sales tax, but also US and global income and transaction tax, as jurisdictions around the world look to close tax gaps driven by the digital economy,” says Manzano.
One of the challenges of the new tax regime is enforcement. Since the sales tax may be imposed regardless of the businesses’ country of origin, it will be difficult for US tax authorities to enforce collection and remittance requirements globally.
On the corporate side, global retailers will face a complex reality, with different kinds of tax and various tax rates in multiple jurisdictions. Retailers will be faced with escalating tax-management challenges and a higher risk for noncompliance.
With sales-tax rates and taxability rules varying across states, threshold variables could add another layer of tax complexity if not standardized. As Manzano points out, businesses will need to look at the new laws on a state-by-state basis and focus first on jurisdictions where they have the greatest potential risk.
As Asia’s traditional bricks-and-mortar retailers lose their market share to larger online retailers, governments are closing the tax gap. Singapore, Thailand and Malaysia are among the countries expected to adopt tax practices for online e-commerce similar to those in the US and Europe.
