Sales Tax Slice: Tax and Trade

Nine rounds of suspenseful NAFTA renegotiations concluded on Sept. 30 with the formation of the United States-Mexico-Canada Agreement (USMCA). Designed to “moderniz[e] NAFTA into a 21st century trade agreement,” reformers sought to address key developments made since the original agreement went into effect 24 years ago, such as the rise of the digital economy. It seems that advancements in commerce—online transactions in particular—have outpaced many efforts to regulate it; whether by tariff or tax, both internationally and interstate. In the sales tax world, it was the increasing dominance of this online market that largely convinced the U.S. Supreme Court to allow states to impose a new nexus standard; one based on “economic” nexus rather than physical presence, a standard conceivably better suited for the times.

USMCA’s modernization in this area includes new guidance on the treatment of digital goods, and a prohibition on the assessment of customs duties for cross-border “express shipments” (most online purchases) that are valued below each country’s specified de minimis threshold. It is important to note, however, that this prohibition does not apply to sales and use taxes imposed by states in the U.S. This is because while customs charges are levied in connection with the importation of goods, sales taxes are levied on their consumption.

In fact, any vendor from a foreign country, including Canada and Mexico, that is deemed to have substantial nexus with a U.S. state—economic or otherwise—is, in principle, as equally responsible for complying with that state’s sales tax collection and remittance requirements as any domestic remote seller. The requirements imposed on international vendors with substantial nexus in a state may also include an obligation to comply with other administrative responsibilities, such as formally registering with the state as a vendor, obtaining a sales tax license, and keeping track of filing dates.

More recently, states that have adopted economic nexus provisions have begun wrestling with the practicality of enforcing their requirements on out-of-state sellers. One might imagine that best practices for international enforcement won’t be released anytime soon.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: How can states better enforce nexus provisions against international vendors?

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