5 tips for managing U.S. sales tax from overseas

If you’re a company outside of the United States and you look to start selling into America, congratulations – the U.S. offers you a huge new market. It also offers complex sales tax obligations you may not know about.

If you sell in Europe, you know about the value-added tax (VAT) on online sales, which is applied at each stage of the supply chain and with rates generally applied at a country level and exceptions on certain products. If you’ve sold into North America’s other big player, Canada, you know about their Goods and Services Tax (GST), Provincial Sales Tax and Harmonized Sales Tax.

The U.S. has taxes on sales too – a lot of them. Almost all U.S. states mandate that you collect from customers and remit the sales tax to the respective states/jurisdictions.

This can confuse even companies with long experience selling into America, so let’s look at some of the details you have to keep in mind and some of the key differences when it comes to U.S. sales tax. (The hyperlinks provide more information as well)

1. Know where you need to collect

Forty-five of the 50 U.S. states (plus the District of Columbia) have a sales tax on most tangible personal property and certain technologies like Software as a Service (SaaS).

States where you don’t have to worry about collecting sales tax are NOMAD: New Hampshire, Oregon, Montana, Alaska and Delaware (but Alaska has several local jurisdictions that are banding together to charge sales tax; the state itself may soon institute its own).

2. Know your nexus status

Many U.S. states began enforcing “economic nexus” after the U.S. Supreme Court’s famous Wayfair decision in 2018. This decision, that South Dakota could mandate that the out-of-state seller Wayfair collect and remit sales tax on a large number of sales into the state, opened the door for other states setting their own – and often widely different – thresholds for sales tax collection and remittance. States generally use the value amount of sales, number of sales or a combination of the two to determine that a seller has a sales tax obligation in that state. View our economic nexus map here.

Other points:

• Different states have different taxability rules for various products and services, such as consulting, clothing, food and other categories. U.S. states also frequently offer sales tax holidays through the year for such items as back-to-school supplies or emergency household equipment.
• Most states require that such marketplace facilitators as Amazon collect and remit the sales tax for you as the seller. Your inventory warehoused by a marketplace facilitator in a particular state could create physical nexus, although a local court did recently rule that sellers’ inventory did not do so in Pennsylvania.
• Local sales taxes can also apply, especially in home-rule states like Colorado, Illinois and Alabama. California also has a ton of local taxes, and Louisiana has a sales tax system infamously complex.

If this sounds confusing, it can be. But it isn’t so different from Canada, where provinces apply widely varying combinations of their three sales taxes.

3. Register

Sales tax registrations are completed at the Department of Revenue of each state where you have nexus and are selling taxable products and/or services. You’ll be issued a sales tax ID number and are granted the authority to collect and remit sales tax in that state. Each state has its own set of rules (of course) on how sellers must file based on certain filing frequencies and methodologies.

As a seller you’ll likely register for either sales tax or seller’s use tax. In most states, the distinction is moot, though some states apply different rates to these various tax types. Some states also have different tax returns that you must file for these different tax types.

4. Know when to file and remit

As with VAT, the seller collects sales tax from the customer but must remit that sales tax money back to the state on a deadline schedule that varies widely by state. Filing frequencies can be monthly, quarterly, semi-annually or almost anything in-between depending on the state.

All sales tax registrations will also ask when you started conducting business in their state. If you register with a start date of April 15th, a jurisdiction will likely require an April return if they have given you a monthly filing frequency. If you have registered with a particular start date but you didn’t start collecting until later, it’s important to file a zero due return or else you could be subject to a late filing penalty.

5. Keep good records

Just as when dealing with VAT and other sales taxes outside the U.S., it’s key to develop a calendar to monitor your deadlines for filing and remittance and a storage system for documentation from states’ tax jurisdictions.

The difference: You’ve got 40-plus little countries to keep track of, one of the most important things to keep in mind when you sell online into the U.S.

Managing your overseas sales and use tax obligations is not a small task. Ensuring you have the right people and processes in place is key to maintaining compliance and not putting yourself or your business at risk. If you’re looking to make a change in how you manage sales tax obligations (or get started), get in touch!