Tax Finally Catches up with the Global Digital Economy

  • August 24, 2018

Finally, the U.S. has wholly embraced the global digital economy by taking its first fiscal step toward participating in global digital taxation. It is not only U.S. states celebrating the Wayfair victory; the European Commission and the OECD are doing the same.

It didn’t even need a treaty, Congressional act or any federal legislation to do so. Although it may have raised more questions than it answered, the much-anticipated case of South Dakota v. Wayfair overruled the physical presence nexus standard, in favor of the more globally-accepted “economic nexus test,” at least by most governments and tax administrations. This standard shift, promises to multiply the revenue of many State Treasuries in the months to come. Given the substantial and incremental evolution of e-commerce and the expansion of the global digital economy, this economic policy shift by the Court, was only to be expected.

The substantial physical presence nexus rule initially applied by the U.S. Supreme Court was no longer a reasonable standard as states were compelled to follow a ruling for sales tax that became outdated in an age of increasing e-commerce activity. The decision in South Dakota v. Wayfair confirmed what states had been arguing for years—the economic “brick and mortar” rule was unreasonable and inefficient, as the state taxation of remote and out-of-state sellers in a digital economy, had become impracticable, both here and abroad.

The economic presence standard, which does not require an actual “physical presence” to trigger a tax nexus, but rather, an “economic presence” in the form of some (virtual) business activity, whether deriving revenue and/or earning profits, as the European Commission stated in its March 21 Proposal on Fair Taxation of the Digital Economy. Although Wayfair’s majority opinion does not mention any international adherence to standards or policies, it did exactly that, fundamentally reaffirming the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 1 on Addressing the Challenges of the Digital Economy.

The Wayfair opinion underscores several significant correlations between the U.S. and European tax policy initiatives, including those of the OECD. Both cite fundamental concerns for fair competition and commerce free from discrimination, barriers, and unlawful intervention on an even playing field.

The U.S. adherence to the physical presence standard was just another “unlisted” barrier adding to the transnational challenges facing taxation in the digital economy and creating market distortions. Although South Dakota v. Wayfair was a domestic issue, it is ultimately about global tax alignment and the digitalization of the world economy.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.

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George L. Salis, Principal Economist and Tax Policy Advisor at Vertex Inc.  Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

George L. Salis

Principal Economist & Tax Policy Advisor

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George L. Salis is Principal Economist and Tax Policy Advisor who is an economist, lawyer and tax professional with over 28+ years of experience in international taxation and trade compliance, tax planning and controversy, fiscal regulation and tax economics consulting. He is responsible for analysis of economic, legal, financial, trade, and development issues in countries, as well as tracking and analyzing the rapid change in tax policies and regulations, and inter-governmental organizations, and tax administrations around the world.

George is the recipient of the Advanced Certificate in EU Law from the Academy of European Law, European University Institute in Florence, and the Executive Certificate in Economic Development from the Harvard Kennedy School of Government.

George holds a BSc in economics and political science, an LLB (Honours), an MA in legal and ethical studies, and an LLM (Honours) in international tax law. He also holds a PhD in international law and economic policy and is a Certified Business Economist (NABE).

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