Recent US Court Decisions and the Impact on Canadian Businesses
 
Canadian Businesses Selling into the US
As Canada’s largest trading partner, the US is a hot spot for Canadian businesses exporting goods. The Canada-US Income Tax Treaty, (the “Treaty”) allows for many Canadian businesses to sell into the US with minimal income tax exposure provided the Canadian business is not doing business through a permanent establishment in the US.
When it comes to sales tax, the previous statement may not hold true.  In the past, the 1992 Supreme Court opinion in Quill v. North Dakota, 504 US 298 (“Quill”) was used to govern whether out of state businesses selling goods to end consumers in the US would be required to collect state sales tax on those sales. In Quill, physical presence (for example, by having an office or warehouse) was adopted as the standard in determining state sales tax nexus. Nexus refers to the determination of whether an out of state taxpayer doing business in the state is liable for collecting and remitting sales tax on sales made into the state. For many Canadian businesses, no physical presence typically meant no requirement to collect and remit sales tax in relation to the sale of tangible product to US consumers.

US Supreme Court overturns Quill
On June 21, 2018, the US Supreme Court opined in favor of South Dakota (“SD”) in South Dakota v. Wayfair, Inc. In this landmark case, what has been often termed as the “tax case of the millennium,” SD was looking to overturn the 1992 Supreme Court opinion in Quill.
In 2016, SD state law required online vendors without physical presence in SD to collect and remit sales tax for sales made to customers in SD. They became the first state to legislate sales and use tax nexus via an economic nexus statute. The state’s economic nexus rules required all entities with yearly sales exceeding $100,000 or 200 or more separate transactions within one year in the state to collect and remit sales tax. Wayfair Inc. (“Wayfair”), an online seller into SD, was required to collect and remit SD sales tax. Quickly, Wayfair challenged this standard and the highest SD court ruled in favor of Wayfair stating that the imposition of an economic nexus standard was not valid in light of the physical presence standard set in Quill. Subsequently, this case found its way to the US Supreme Court- argued on April 17, 2018 and decided on June 21, 2018.
In a 5-4 decision, the Highest Court held that because the physical presence rule of Quill is “unsound and incorrect”, both Quill v. North Dakota and National Bellas Hess, Inc. v. department of Revenue of Ill., 386 US 753 are overruled (these cases dealt with the sales tax physical presence nexus test). The majority opinion stated that the physical presence nexus standard doctrine had become “further removed from economic realty,” resulting in state revenue loss and “as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.” Note that under the principles of the Commerce Clause, state regulations may not discriminate against interstate commerce and states may not impose undue burdens on interstate commerce. The Court concluded that the physical presence test puts businesses with physical presence in a state at a competitive disadvantage to remote online sellers.

What to Expect Post-Wayfair?
More than 30 states currently have laws in the book taxing online sales. The Wayfair decision will definitely change how states implement these laws. Approximately, 20 states already have economic nexus rules in place and it is expected that many more will switch to an economic nexus model post-Wayfair.
This epic decision has far-reaching implications for all states and all taxpayers making sales for which they may not have been collecting sales and use taxes. All taxpayers should immediately consider the impact of this decision on their operations.
Businesses are encouraged to consult with their US tax advisors who are knowledgeable in state sales and use tax in order to review many of the technical aspects of their operations and address how the upcoming state legislations would impact them.
 
Janice Connors is a Senior Manager at KPMG and she leads the US and Cross-Border Tax Services practice in Atlantic Canada.
Janice can be contacted at jconnors@kpmg.ca