Tag Archives: sales and use tax

Implications of the Supreme Court’s Refusal to Hear Nexus Appeal

On December 2, the Supreme Court of the United States declined to grant writ of certiorari filed by two online retail giants, Amazon.com LLC and Overstock.com, Inc.    The broad issue at hand, is whether online retailers must charge, collect and remit state sales tax in states where their customers are located, but where the online retailer has no physical presence.  The issue, although not new, could have quite an impact on online retailers worldwide.

In 1992, the Supreme Court held that a physical presence, in the state where the customer is located, is necessary to establish a nexus between a company and the state for the purposes of sales tax.  The State of New York, concluded, more recently, that sellers who sign up for the Amazon affiliate program create that nexus.  This is a tenuous conclusion since the sellers are, in fact, simply another Amazon.com customer; the product purchased is access to Amazon retail customers through a link on a website.  Amazon.com has no control over the website, does not employ the seller or have any trappings of a typical office in that state.  The Supreme Court’s refusal to hear the appeal could be taken as a broad expansion of the state’s power to tax.  This could have a ripple effect for online retailers located in other countries.  The cost of having to charge, collect and remit sales tax to each of the 52 states will create a significant hardship for small to medium sized companies.

The physical presence/nexus concept is not different from the treaty concept of permanent establishment.  U.S. online retailers selling into other countries have not had the burden of charging, collecting and remitting VAT or other tax on sales, if they had no permanent establishment in that country.  The question will now be whether the physical presence of a sales affiliate program similar to the Amazon.com will trigger a permanent establishment, not simply for the purposes of VAT, but also income tax.

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VAT, Sales and Use Tax on Electronically Supplied Services

Supplying services over the internet is not a new business model, although its use has become easier and more prolific with advancements in technology.  The question of whether and where such services are subject to VAT and sales and use tax has yet to be definitively answered. The general rule was that the VAT and sales and use tax were where the services supplier is located.  But subsequent EU Directives, starting in 2002, changed that general rule.  The 2006 EU VAT Directive, Annex 11 defines “electronically supplied services” to include website supply, web-hosting, distance maintenance of programs and equipment, supply of software and updates, supply of images, text and information, and making databases available, supply of music, films and games of all kinds, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching, but, significantly, excludes instances in which the services supplier and its customer communicate be means of email.  Article 7 of Council Implementing Regulation of 15th March 2011.

Therefore, it seems internet communication generally regarding commercial transactions, facilitating trading or other communications that take the place of telephone or fax are not subject to the VAT or sales and use tax rules.  The difficulty arises when the services supplied provide include both electronic communication and other components.

The EU, since 2010 has implemented the VAT Place of Supply of Services rules to more accurately impose VAT and level the playing field for EU businesses.  Where the services are provided to business located in the EU, VAT would be charged at the place where the customer has its business.  If the business customer is located outside the EU, then no VAT charge would be triggered.

If the services are supplied to a consumer within the EU, then VAT is charged in the place where the services supplier is located.  If the consumer is located outside of the EU, then no VAT is charged.  Alternatively, if the services are supplied by a business located outside of the EU and the consumer is located in any EU Member State, then VAT is charged.  This is specifically provided for in Section 34(l) VAT Consolidation Act 2010 transposed from Article 58 of the 2006 VAT Directive. However, there will be a fundamental change, as of January 1, 2015, the place of supply of electronic services will be the place where the customer is established, regardless of where the services supplier is located.

For example, if a US business electronically supplies services to an German consumer the place of supply (and of taxation) is Germany. The US business must then register and remit VAT.  There is program, designed to reduce the registration and complexity, that allows a non-EU business to register in one Member State only.  Then charge and remit VAT for all supplies of services to private consumers made within the EU.

Before making electronic services available over the internet, determine whether that supply of services will be subject to VAT or any other sales and use tax.  If your services will be subject to VAT or other sales and use tax, register and include it in the fee for services.  Remember in the EU, the fee charged to a private consumer must include the VAT charge as an inclusive price.

 

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