The United States has possibly the world’s most complex sales tax regime. This is because each state sets its own sales tax rules, and states often take widely varying approaches. As a result, each state has a different tax framework, with varying rules around everything from tax liability and tax rates to exemption categories and reporting requirements. On top of this, local area tax jurisdictions also have power over some aspects of taxation and can set different rules for their area.
Given the wide variety of rules and the rapid rate of change, every business selling into the US faces several practical compliance challenges. Here are a few to consider when looking at building your US sales tax approach.
Destination or origin-based sales tax rules?
If you do not have a physical presence within the states, or you only have a physical presence in one state within the US, for any sales outside of that state, you are considered a remote seller. As a remote seller, you will normally follow destination-based tax rules, meaning you must, in theory, apply the sales tax rules and rates of the customer’s location. But there can be cases where remote sellers are seen to make sales within a state - for example, when goods are held in a warehouse in the state. In this case, origin-based tax rules apply. You must then collect and remit tax according to the rules and rates applicable at the business location.
Origin-based tax rules
Origin-based sourcing applies to intrastate commerce. When a seller ships from within an origin-based state to a destination within the same origin-based state, the sale is sourced to the origination point and sales tax applies at the origination point.
Destination-based/remote seller tax rules
Destination-based sourcing applies to interstate commerce. When a seller ships into any state from a location outside that state, the sale is sourced to the destination point and sales tax applies at the destination point.
For a list of origin vs destination based states – check out this info from the Sales Tax Institute
Once this has been determined it’s time to understand tax rates based on your customers’ location and ensure you are charging the right rate based on their location.
In the US, tax rates are often applied at a ZIP code level. In many cases, this will mean that the 5-digit US zip code is used along with the product taxability code to determine the sales tax rate. For more accurate sales tax rates 'ZIP + 4' code can be used as well as specific address level determination to identify the precise taxing jurisdiction.
But what if an address is not given? Often this happens when there is no item to physically ship, such as software or a digital download. For these, it gets a bit more confusing, and this can change per state, but often an IP address can be used to determine a more accurate billing address.
Selling into the states, especially when you do not have a physical presence, can be extremely difficult to manage alone. If you’re looking for help with managing a multi-state sales tax obligation, it’s often best to work with a sales tax expert to ensure you are maintaining compliance and not putting your business at risk for penalties and fees.
Contact TaxConnex to learn how we can help alleviate the burden managing sales tax.
This blog is an excerpt from a longer eBook – Download our eBook with Taxamo – A Practical Guide To Selling into the US.