Foreign Remote Vendors and the Possibility of Non-Compliance: Is the Only Thing We Have to Fear is the Fear Itself?
Richard D. Pomp, Foreign Remote Vendors and the Possibility of Non-Compliance: Is the Only Thing We Have to Fear is the Fear Itself?, 37 J. Tax'n 39 (2019).
4 Pages Posted: 27 Mar 2019
Date Written: 2019
In South Dakota v. Wayfair, Inc., the Supreme Court eliminated Quill’s physical presence nexus requirement for use tax collection. Now, both foreign and domestic remote vendors without a physical presence must collect and remit a state’s use tax if they satisfy its nexus rules. With respect to actually collecting and remitting the tax, however, a major difference between foreign and domestic vendors would arise. Under the United States Constitution’s Full Faith and Credit Clause, any state can enforce a judgment in another state. No such rule exists in the foreign realm. Thus, if a foreign vendor refuses to collect and remit a state’s use tax, the state would need a foreign court to enforce its judgment, notwithstanding the hoary rule against such a practice. (While an extensive network of income tax treaties has superseded this rule, those treaties are typically limited to federal income taxes, and generally have no impact on state sales or use taxes.)
If a non-compliant foreign vendor has assets in the United States, a state could seize those assets to satisfy its judgment. This, however, is no guarantee, as foreign vendors could easily use distribution facilities in Mexico or Canada to service the United States, and use servers in those countries to sell downloadable intangible property.
Nonetheless, there are other options available for states to adequately enforce their nexus rules against non-compliant foreign vendors. First, foreign vendors using United States banks to process credit card purchases are vulnerable to having their accounts seized to satisfy a state’s judgment under the myriad requirements of Code Sec. 6050W(c)(2). (To avoid this issue, foreign companies could proactively cease all contacts with United States financial institutions, although this would be difficult and costly.) Second, the United States Customs Bureau could seize packages sent from vendors with outstanding judgments at airports and docks. But this avenue seems more like a Pollyannaish dream than a practical remedy given the volume of imports flowing into the country and the ease of using shell corporations with different names, which is a practice to avoid sanctions. Third, some states have enacted marketplace facilitator laws that require the collection of use taxes on all third-party sales. The major platforms have complied with these laws so far, and these statutes are sweeping the country. Where applicable, foreign vendors will have the platform collect and remit the sales tax.
All in all, the fear of widespread non-compliance by foreign vendors appears exaggerated. As marketplace facilitator legislation becomes more commonplace, this threat will wane even further.
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