Tax Bulletin

On June 21, 2018, in South Dakota v. Wayfair ("Wayfair"),1 the United States Supreme Court (the "Court") reversed its decades-old ban on states imposing a sales tax collection obligation on out-of-state vendors without an in-state physical presence.2 As discussed below, the impact of the Wayfair decision on non-U.S. providers of U.S. destination-based travel solutions appears limited.

In this note, we briefly review the U.S. sales tax regime, its application to U.S. destination-based travel solutions offered by non-U.S. providers, and the impact, if any, the Wayfair decision may have on the sales tax collection obligations of non-U.S. providers of U.S. destination-based travel solutions.

U.S. Sales Tax Regime

In the United States, there is no national-level value-added or consumption tax. Instead, most states (45 of the 50), Washington, DC, and, to the extent permitted by the states, their political subdivisions, such as counties and cities, have their own consumption taxes, colloquially known as "sales and use taxes." Official names of the taxes, taxable purchases, and tax rates vary quite a bit among jurisdictions. Within a single state, multiple levels of tax (for example, state, county, and city) can apply to the same transaction.

Despite variations among jurisdictions, the sales and use tax regimes share certain common traits, such as the following: (i) the taxes are imposed on the retail purchasers of tangible personal property and, to the extent specified by law, intangible personal property and services; (ii) the taxes are levied on the retail purchaser as a percentage of the gross sales price of the taxable property or service; (iii) the sales tax is imposed by the jurisdiction where the sale takes place (i.e., where the taxable goods and services are "used" or "consumed" by the retail purchaser (generally, where the taxable good or service is "received" by (or delivered to) the purchaser)); (iv) if the sale occurs within the jurisdiction of use or consumption, the vendor is required to collect sales tax at the point of retail sale and remit the tax to taxing authorities and no use tax becomes due; and (v) if the sale is made by a remote vendor such that the sales transaction does not occur within the jurisdiction of use or consumption, and if no sales tax is collected, then the remote vendor is obligated to collect and remit the sales tax only if it shares a "substantial nexus" with the taxing jurisdiction.

U.S. Sales Tax Application to U.S. Destination-Based Travel Solutions

Sales and use taxes generally apply to many aspects of U.S. destination-based travel solutions, potentially including lodging, food and beverage, tours, and recreational and resort activities. Taxable goods and services forming part of such U.S. destination-based travel solutions generally are considered used or consumed at the travel destinations and taxed accordingly. Typically, if a purchaser pays for a travel solution upfront, the non-U.S. provider will collect applicable sales tax as part of the upfront payment and remit to U.S. vendors of the taxable goods and services. If a purchaser opts to defer payment until he/she is on-site at the travel destination, the U.S. vendor directly collects and remits the taxes.


Wayfair dealt with the question of when the sales tax collection obligation of the purchaser's state is imposed on an out-of-state vendor if such vendor is not physically located (for example, no personnel, stores, offices, or warehouses) in the purchaser's state (i.e., the state of use or consumption). Specifically, Wayfair looked at whether online retailers without a physical presence in a state can be required to collect that state's sales tax on consumer goods sold and delivered to that state's residents via common carriers (for example, via the U.S. Postal Service).

As discussed above, in most states, the sale of taxable goods and services is subject to sales tax when the goods and services are used or consumed by the purchaser in the taxing state. Before Wayfair, however, if a vendor had no physical presence in the taxing state (for example, personnel, store, office, or warehouse), states could not require the vendor to collect and remit sales tax under the then existing U.S. Court's view that such an obligation resulted in undue burden on the vendor's ability to engage in businesses across U.S. state lines, in violation of the "Commerce Clause" of the U.S. Constitution. Although purchasers are required to pay the tax if the vendor does not collect it, the compliance rate with purchaser remittance has historically remained low.

In Wayfair, given the development of the online retail industry and the physical presence requirement's unintended and undesirable side effects on interstate commerce, the Court reversed the existing rule by holding that the physical presence rule no longer was the prerequisite for the states to be able to impose the sales tax collection obligation on out-of-state vendors. The Court instead determined that the states could satisfy the "substantial nexus" standard under the Commerce Clause of the U.S. Constitution based on a remote vendor having "economic nexus" with the taxing state.

The Court held that South Dakota's economic nexus law satisfies the Commerce Clause requirements because it imposes reasonable minimum thresholds of economic activity connecting the remote vendor with South Dakota. Under South Dakota law, this economic nexus is established if a vendor delivers more than U.S. $100,000 of goods or services into the state or engages in 200 or more separate transactions for the delivery of goods or services into the state on an annual basis. However, the Court did not provide a bright-line test for the economic nexus, creating a level of ambiguity on the part of the states and the vendors. Many U.S. states have adopted or are in the process of adopting an economic nexus requirement similar to the South Dakota one, while others are experimenting with other forms of economic nexus.

Wayfair's Impact on Non-U.S. Travel Solution Providers

As discussed above, Wayfair primarily affects online retailers who sell consumer goods to purchasers in states where the online retailers do not have a physical presence. Its application to non-U.S. travel solution providers appears limited because of the difference in where the goods and services are used or consumed.

While, at first, the Wayfair fact pattern appears similar to non-U.S. providers' sale of U.S. destination-based travel solutions, consumer goods are used or consumed in the purchasers' states, while the travel solutions generally will be used or consumed in the states where the U.S. vendors are located. For example, a mobile phone purchased by a resident of North Dakota on a website run by a vendor located in California will be used in North Dakota, while lodging at a California hotel purchased by a resident of the UK will be used in California.

Therefore, U.S. vendors already collect sales tax on lodging and other travel solutions (either through the non-U.S. providers or directly), and as long as the non-U.S. providers continue to comply with applicable sales tax collection rules as they apply to travel solution arrangements, it does not appear that Wayfair should have a major impact on how non-U.S. providers comply with the U.S. sales tax rules.

Notwithstanding the limited impact of the Wayfair decision, however, it may be prudent to review and confirm that a non-U.S. provider's existing business practices do not raise sales and use tax compliance issues going forward. For example, some U.S. states (including South Dakota) have adopted laws that tax the provision of services to their residents by out-of-state vendors who exceed certain thresholds (such as the annual sales volumes or transaction numbers), which, until the Wayfair decision, was a moot point as long as the vendors did not have a physical presence in-state.