United States versus Japan Sales tax
Although the basic characteristics and purpose of sales tax are universal throughout the world- namely, a flat tax applied to consumers to raise revenue for the government – there are marked differences between how such taxes are regulated in the United States compared to other countries, such as Japan. These differences relate to who is responsible for paying the tax and at what stage it is applied. For example, in Japan, the consumer tax system is based on the Value Added Tax (VAT), in which the tax is levied on the sale of most goods and services at every stage of the supply chain, from production to final retail. However, businesses are entitled to claim credits for the tax paid on their purchases, ensuring that only the final consumer ultimately bears the tax burden.
In contrast, the U.S. sales tax is simplified and only levied at the ultimate point of the transaction, when goods or services are delivered to the final consumer. The principal advantage of this system is its simplicity, as opposed to the VAT system, where multiple collection, remittance and reporting are required. However, from the government’s perspective, the Japanese system provides an almost foolproof method to ensure compliance, as the transactional trail created at each stage makes tax collection more secure. By comparison, the U.S. tax system is vulnerable to tax avoidance due to its dependence on a single collection event at the final stage of the transaction. As such, U.S. state tax authorities are vigilant for compliance violations and regularly conduct widespread sales tax audit of sellers.
Jurisdiction & Nexus
As aforementioned, the U.S., sales tax is under state jurisdiction and not under federal jurisdiction. This is a significant difference since in other countries like Japan, the consumption tax is under the federal or national jurisdiction, so sales tax is only triggered by the movement of goods; in other words, the location of the purchaser or seller has no bearing on taxability. On the other hand, in the U.S. where states have jurisdiction, the location of the buyer and seller is highly relevant, as this determines nexus and compliance obligations. In general, nexus is defined as the company’s connection or relationship to the state before it can tax the company. Each state can assert sales tax when purchaser or consumer of the product resides in the state and the seller has some connection with the state such as an office or having employees. Before 2018, the U.S. Supreme Court (Quill Corp v. North Dakota -1992) had ruled that states can assert sales tax only if the seller has non-trivial physical presence in the state. Non-trivial presence was interpreted as actual physical presence, which means having an office location, warehouse, inventory, or employees in the state establishes nexus and is subject to state sales tax. This denotes that if the seller has sales in the state, but does not have physical presence, they are not liable for sales tax. However, in 2018, the Supreme Court (South Dakota v. Wayfair Inc) changed its previous ruling and created an additional new economic standard by stating that amount and number of transactions can be used as indicator of nexus. So, after 2018, sellers that did not have physical presence would still be liable for sales tax if they satisfied the new economic nexus. (Please note that prior regulation regarding physical presence was not overruled but continues to be in effect). One must understand that courts had acknowledged the development of technology, namely the internet, as well as the creation of business based on online transactions such as “Amazon’s marketplace facilitator” that affected and changed the basic conduct of commerce. So, under this new environment, tax laws were changed to reflect and accommodate these changes.
So, what does this mean for companies conducting business in US? This means that companies that does not have any physical presence in the state can still be taxed if they satisfy the new economic nexus rules. For example, if your company in California sells products to Illinois where you have no physical presence, and the amount of transaction during the year exceeded $100,000 or two hundred or more transactions, then the business will be considered to have nexus in Illinois and now has a sales tax liability in Illinois. As such, the company must now register the business with Illinois, withhold, and remit sales taxes and timely file reports to the state of Illinois. The company would also be retroactively liable for prior year taxes since the enactment of the new law.
As a result, the company (seller) without a physical presence must carefully monitor both the volume of sales and the number of transactions conducted in each state to determine whether it has established nexus.
Severe penalties
Since the states classify sales tax as a form of withholding tax, the company (seller) is deemed the withholding agent for collecting the buyer’s tax. The states consider those taxes as the state’s property and treat compliance violations with utmost severity, with some states even treating it as a criminal offense, subject to significant penalties. Interest is also accrued on any unpaid amounts. Application of the statute of limitations may not be applicable in such cases meaning, that states can pursue all the years that the seller company had nexus, which means withholding, remittance and filing requirement of sales tax returns.
Liability for the sales tax
Even though sales tax is paid by the purchaser or consumer, as a seller, if you did not withhold and remit the taxes, the ultimate responsibility of satisfying the liability would be on the seller.
Disclaimer:
This material has been prepared for general informational purposes only and does not constitute, and should not be relied upon as, accounting, tax, legal, or other professional advice. The information contained herein may not be applicable to all situations and may require consideration of additional factors or circumstances. You should consult with your qualified accounting, tax, or legal advisors before taking or refraining from any action based on the information provided.
