U.S. Sales Tax Basics for International Companies

Companies outside the United States that sell into America most likely know sales tax obligations from experience with Europe’s value-added tax (VAT) or Canada’s Goods and Services Tax (GST) and Provincial Sales Tax (PST).

Is that enough to sell into the U.S. and meet sales tax obligations?

The U.S. has no national sales tax for remote sellers and businesses. Most of America’s states (and its thousands of other, smaller jurisdictions) sure do, and in important ways that differ from sales tax obligations outside the U.S.

Here’s what you need to know about sales tax for international companies.

Nexus

Nexus is your connection with the tax jurisdiction in question. Once you establish nexus, your company is responsible for collecting and remitting sales tax in that jurisdiction. In the U.S., nexus can be economic, physical or both.

The first kicked in like wildfire after the 2018 U.S. Supreme Court Wayfair decision in which the High Court ruled that the American state of South Dakota could require businesses with no physical presence in that state to collect sales tax. Many other states have adopted similar statutes, now mandating that businesses collect the applicable sales and use tax providing those companies surpass thresholds of dollars or volume of sales, usually annually.

Physical nexus has become more complex. Office space, salespeople, independent contractors, delivery personnel, and trade show reps in an American state have long been able to create physical nexus; California, Texas, and Washington have been particularly aggressive about this.

A question recently emerged concerning warehoused inventory, especially that housed by marketplace facilitators like Amazon. Generally, a marketplace facilitator contracts with third parties to sell goods and services on its platform and facilitates retail sales.

Laws governing facilitators popped up when states began to realize that platforms like Amazon were taxing sales of their products but not always charging sales tax on third-party sales. For physical nexus the question became, “Where is that inventory housed?” This hasn’t yet been completely answered in the U.S. Stay tuned.

If your company has no economic or physical nexus in an American state, you likely have no obligation to collect or remit sales tax in that state.

Taxability

Nexus depends on the taxability of your products or services, and American states’ rules differ here, too. If you sell items considered tangible personal property, they’re likely taxable for sales and use tax purposes. Among other complications:

• Exemption certificates for sales tax play a crucial role in determining the taxability of services, which are typically exempt unless specified otherwise, although this is subject to change in certain states.
• Among other Many states’ rules don’t even address how some digital products are taxed, such as Software as a Service.
• Many American states such as Florida, Texas, New Jersey, and many others hold periodic sales tax holidays on such items as emergency equipment, gun-safety gear, and back-to-school supplies.

Clients ask us, “How often should we evaluate the taxability of our products?” Annually should work. Most U.S. states change their sales tax rate laws on either Jan. 1 or July 1, by the calendar year or by the fiscal year.

A sales tax exemption certificate also alleviates a company from collecting and remitting sales tax on certain products and services. The purchaser is responsible for determining whether a sale is exempt from tax.

Registration

Sales tax registrations are completed at the Department of Revenue within each state. Each state, yet again, has its own set of rules for which companies must file based on certain filing frequencies and methodologies.

Register for the correct tax: Should you register for sales tax, seller’s use tax, or consumer’s use tax? As a seller, you will likely register for either sales tax or seller’s use tax (some American states apply different rates to these various tax types, so it’s important to get this right). Some states will have different tax returns that you must file for these different tax types.

All sales tax registrations will have a question as to when you started conducting business in their state. If you register with a start of April 15, 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 there was a change of plans and you did not start collecting until a later time, it is important to file a zero-due return or you could be subject to a late filing penalty.

You should also not immediately register in a state without understanding if you have any potential prior period tax exposure, as this can limit your ability to later mitigate prior-period risk.

Compliance

Some companies are shockingly willing to roll the dice and take their chances with non-compliance with American sales tax. What happens if you do get caught?

Punishments can range from assessments, penalties, and liens to the use of collection agencies or referrals for criminal action. Let’s say you are selling a product and/or service in a jurisdiction that you have nexus in but are not taxing your customers. In the first year, your company’s sales total 10 million USD and grow 20% annually over the next three years (totaling 36.4M USD in sales). With an average sales tax rate of 8%, that’s more than 2.9 million USD of tax you should have collected. Add penalties and interest and that’s a big number for any business to cough up.

Jurisdictions might unearth your company’s nexus (and non-compliance) through an audit – and not just an audit of you. A customer undergoing their own sales tax audit might produce one of your invoices, resulting in the auditor possibly contacting you for a certificate of exemption or other documents. A state may also find that you didn’t charge the client sales tax on transactions. An audit of one of your suppliers could also turn up one of your exemption certificates for something the auditor may think is taxable – resulting in a flag for an audit of your company.

There’s no statute of limitations for unfiled returns; unpaid tax liabilities can compound indefinitely, leaving you to pay for all the liability. Penalties associated can start at 25% of tax liabilities. And even non-filing of zero-taxable sales can result in penalties.

If you think you're impacted by sales tax for international business, contact TaxConnex. We can become your outsourced sales tax department. Get in touch to learn more.