June 21, 2022
Growing your business abroad is exciting but also brings additional responsibilities, tax, and legal issues included. Today, we will discuss expanding your online or physical business in the US and explain the sales tax aspects of this step.
By reading this article, you will learn about the peculiarities of selling to customers in the US and find some actionable steps that can help you set up your operations in the states, including determining when you should begin collecting the sales tax and staying compliant.
How is selling in the US different from business operations in other countries?
Each country in the world has different regulations for foreign entities. This creates a global market where business owners prefer some countries and avoid others regarding business expansion.
The US provides a vast, almost unmatched customer base for selling products and services. However, beginning operations in the country sometimes get more complicated due to varying rules and regulations in different states of the US.
The most relevant tax for foreign business owners in the US is the sales tax, the equivalent of the value added tax in Europe and many other countries. Most states have adopted the sales tax to some extent, mainly making it mandatory to add the sales tax rate to goods and, in some cases, services.
Like the VAT, the sales tax is levied on the final customer and is collected by the seller at the point of purchase. Not all companies must begin collecting the sales tax immediately. Here’s how to know if you should already prepare to manage the sales tax:
Figure out if your activity in the state creates an obligation to collect the sales tax
A company can be a sales taxpayer in one, several, or most of the US states. It is decided by the extent of its sales or the physical presence of the company’s staff, facilities, or warehouses. Such a significant tie with a state is called a nexus and can be either physical, economic, or, in some instances, a special kind.
A physical nexus is simple. It means that a company has to begin collecting the sales tax if it has an office, other facilities, staff, or other representatives in the state. On the other hand, remote sellers must take notice of the economic nexus – a threshold for the volume of the company’s economic activity in the state. The thresholds differ state-by-state and can be measured by the number of transactions with the customers from the state or their value. Other types of nexus can be neither physical nor economical. These include storing tangible goods in warehouses in the state, taking part in trade fairs, having affiliates in the state, and similar.
Please note that storing goods in Amazon’s (FBA) or other warehouses in the state typically creates a sales tax nexus.
As each of the states has a different set of sales tax nexus rules, you as a company should be mindful of the threshold in each of the states where you sell or plan to begin selling your goods so that you are not late to register as a sales taxpayer in that location.
Getting a sales tax permit
To begin collecting the sales tax in the state, it is not enough to establish a sales tax nexus – you will have to get a sales tax certificate. It is acquired by registering at the local sales tax authority. In contrast to the European Union, where companies can use the unified OSS system for VAT, the United States doesn’t have a centralized way of collecting the sales tax.
Therefore, if your company sells taxable goods or services, you must register at the state’s department of revenue or other tax authority as soon as you establish a sales tax nexus. In the majority of the states, the sales tax permit is free of charge.
If you fail to register as a sales taxpayer, you might face fines, interest on the tax that should have been collected, and other consequences.
Collecting and filing the sales tax
As if it wasn’t complicated enough, a state isn’t the smallest jurisdiction where different sales tax rules apply. Most states have a varying sales tax rate that consists of the base (or the state’s) rate and local (city, municipality) sales tax percentages. This characteristic of the US taxation system has two critical implications for a seller (especially a remote company).
First, the customer’s location often decides what sales tax value should be added to a good’s final price. It cannot be calculated after the sale by deducting the VAT from the selling price as the tax rate, and the amount must be shown on the receipt.
Secondly, a seller must collect more information about its customer and use it when putting together its tax reports.
Getting the sales tax straight
These are the most fundamental aspects of becoming a seller in the US. If you feel overwhelmed, you shouldn’t let the feeling stop you from expanding your business in one of the world’s most developed markets. Our experienced experts have a track record of supporting business development and helping companies solve VAT and sales tax issues globally. Get in touch now!