US Sales Tax Rules Evolve For Canadian Sellers
1992 – Quill Corp
The state sales tax laws in the US have benefited many out-of-state online remote sellers and their customers, because of a 1992 US Supreme Court case.1 However, that changed for many out-of-state sellers, including foreign sellers, because of a new US Supreme Court case decided June 21, 2018.
The 1992 US Supreme Court case decided that states could not levy sales tax on out-of-state online sellers if the seller had “no physical presence in the taxing state.” Since then, frustrated by their loss of revenue on sales to their residents, the states have enacted a complex series of alternative (innovative) “nexus” sales tax laws to attempt to circumvent the 1992 ruling. They include such concepts as “Click Through Nexus”, “Affiliate Nexus”, and “Economic Nexus” (for example, having a prescribed volume of sales in the state, even when there is no physical presence in the state). The US Supreme Court has not yet addressed any of those laws.
2018 – Wayfair Inc.
The 2018 Supreme Court case, 2, which specifically addressed the existing South Dakota sales tax law, overrode the 1992 law. The court decided that states may collect sales tax from out-of-state (including foreign) retailers that operate solely remotely online, even if the seller does not have a physical presence in the taxing state.
The decision emphasized that the substantial nexus requirement under the Commerce Clause is satisfied when a business avails itself of the substantial privilege of carrying on business in a jurisdiction, which does not necessitate physical presence. This ruling has led to many states adopting similar economic nexus standards, often using the $100,000 sales or 200 transactions threshold as a benchmark.
The Wayfair decision has significant implications for remote sellers, as it allows states to require tax collection based on economic presence, thereby leveling the playing field between online and brick-and-mortar retailers. It also raises questions about compliance burdens on small businesses and the potential for states to impose varying nexus standards.
The Wayfair decision represents a shift towards recognizing the realities of the digital economy and the need for states to capture tax revenue from online sales, which had previously been difficult under the physical presence rule.
Canadian Companies Selling to the US
Canadian businesses selling into the US, will now have a new maze of rules to address - often different rules for each state in which sales are made.
The case triggered complex new state sales tax rules over the last seven years, that may affect many Canadian businesses that sell into the US, even if the Canadian business has no US agents or other personnel or presence in the US.
At the moment, 45 US states and the District of Columbia impose a sales tax. Sales tax is imposed if the seller has “nexus” in the particular state into which the sales are made. Many states allow local jurisdictions to impose their own sales taxes. These can include county, city, and special-purpose sales taxes. States vary on the date they adopted the provisions of Wayfair. Also, some states use gross sales to determine the threshold amount, and a couple use taxable sales only. States can also have a transaction threshold. However, there are many different kinds of nexus, including (but not limited to):
- Physical presence nexus
- Click-through nexus
- Economic nexus
- Marketplace facilitator
Each state defines each of those concepts differently, so one must examine the rules for the particular state into which you are selling. Some products, and some buyers, are exempt from sales tax, and again, those rules vary by state.
Physical Presence Nexus
Of course, “physical presence nexus” exists when the out-of-state seller has some form of physical presence in the state, perhaps including a sales agent. Each state defines physical presence differently.
Click-Through Nexus
The “click-through nexus” rules generally provide that an out-of-state seller must collect sales tax for a given state if the seller has a person or business within that state that refers sales to the seller’s online business (for example, to the seller’s website) and collects a commission. This could apply, for example, if a US entity’s website refers a buyer to your website.
Economic Nexus
The newer “economic nexus” rules require the out-of-state seller to collect sales tax if the sales volume simply exceeds a certain volume and/or transaction threshold level. No other requirements must be met. For example, if a Canadian business has $100,000 in annual sales into Michigan (or 200 transactions per year), the Canadian business is subject to Michigan sales tax.
Marketplace Facilitator
Most recently, 44 states have developed a new sales tax concept referred to as “US. marketplace facilitator.” Unlike the preceding nexus rules, where the sales tax liability is placed on the seller, in the case of a marketplace facilitator, the first liability is placed on the facilitator itself.
A marketplace facilitator is an entity that performs the following functions:
- Contracts with sellers to market their product through a marketplace for a consideration,
- Is involved with communicating the offer and acceptance for the sale, and
- Performs any other service, such as payment processing services.
The marketplace facilitator must collect and remit sales tax if:
- The marketplace facilitator has a physical presence in the state where the sale is made.
- The seller has a physical presence in that state, or
- Their annual sales in that state surpass the sales tax registration threshold and the economic nexus threshold for that state.
This would apparently apply to Amazon and Etsy, among others.
The expansion of economic nexus standards through the Wayfair decision signals a long-term shift in tax compliance for remote sellers. Whether your business is entering the US market for the first time or expanding into new states, sales tax obligations may apply—even without a physical footprint.
For Canadian businesses, staying informed and proactive is key to managing cross-border tax exposure and avoiding unnecessary penalties.
How AbitOs Can Help
At AbitOs, as specialists in international taxation, we understand the complex challenges that Canadian businesses face when navigating US sales tax rules post-Wayfair.
The shift from physical presence to economic nexus has significantly increased exposure for remote sellers, often triggering registration and filing obligations in multiple states—even without any US presence.
Our team of cross-border tax experts can help by:
- Evaluating Nexus Exposure
- Managing Sales Tax Compliance
- Advising on Marketplace Facilitator Rules
- Offering State-Specific Guidance
Whether you're entering the US market or expanding across new states, we can help you stay compliant, reduce risk, and focus on growth. Contact us, if you have questions about your US sales tax obligations.
1 Quill Corp v. North Dakota, 504 U.S. 298.
2 South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).
