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Managing a US Sales Tax Obligation - Your Need to Know Guide

Introduction:

Selling your products/services into the US opens a sizable range of sales opportunities, but it could also open the door to significant complexity in managing your US sales tax obligations. As a business based outside of the US you may think you have no obligations to sales tax, but that is not necessarily the case.

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, some local area tax jurisdictions also have powers over some aspects of taxation and can set different rules for their city or county.

If you sell into multiple US states, what does this complex landscape mean for your day-to-day sales tax management?

In this guide, we explain key US sales tax considerations for foreign companies conducting business in the US.

Click on the links below to skip around the article to specific topics, or read it all the way through!

Understanding Nexus

The NOMAD States

Taxability

Registering for Sales Tax in the US

Obtaining an EIN

Charging the Correct Sales Tax

Setting Up a Compliance Process

Conclusion / Consider Outsourcing

Telecom & VoIP Tax Educational Content

Understanding Nexus for Sales Tax

 

Sales and use tax nexus is a connection between a person or entity and a US taxing jurisdiction. Sales tax nexus is the basis for all your sales tax decisions because without sales tax nexus you have no further obligation to a state. If you do have sales tax nexus, then you need to dig a bit deeper. But what exactly defines when you have sales tax nexus?

From a sales tax perspective, it is either a physical or economic presence. As a business headquartered outside of the United States, you may need to focus more on economic nexus, but it is a good to understand what creates a physical presence as it is more than just an office location. Many businesses get tripped up in thinking they only need to worry about an economic presence and later find out they do in fact have a physical presence without employees or an office within a state.

 

There are some obvious examples of physical presence including an office or an employee in a state. However, don’t be fooled by the lack of this true physical presence. States can also assert sales tax nexus if you travel into their state, exhibit at trade shows, or use independent contractors to solicit business or provide some type of service to your end customer.

Consider the common business activities to the right that can create physical tax nexus:

sales tax shopping cart

 

Employees or an Office in the US

Probably the most common way to create physical nexus within a US state is to have employees working in the state or by having an office building.  It is important to remember that even if an employee is working remotely, not in one of your offices, they can create a physical presence. 

Attending Tradeshows

Doing business temporarily in state can create a physical presence. Where this may trip you up, is that if you are attending multiple US tradeshows and conducting business while in attendance, you could be creating a physical presence. 

Traveling Sales Reps

This falls under the same methodology as attending tradeshows. But if you have sales reps traveling to a specific state multiple times to conduct business or have sales meetings, you could be creating a physical presence. 

Storing Inventory

Storing inventory or maintaining a warehouse in a state can create a physical presence. It is important to consider warehouses if you are utilizing a marketplace such as Amazon who has warehouses all over the world. 

Outside Contractors

If you utilize local contractors to perform services on your behalf such as installation or repair services for customers in a state, you could create a physical presence where they operate. 

The second category of sales tax nexus came into effect in 2018 and is referred to as economic nexus. The South Dakota vs Wayfair, Inc. court case led to the largest change in US sales tax in over 50 years, redefining nexus as not only a physical presence but also as a certain amount of sales and/or a certain number of transactions in a state or jurisdiction. This is now referred to as economic nexus. All states with a state-wide sales tax have adopted some form of economic nexus that requires an out-of-state business to collect and remit sales tax. These obligations potentially affect many industries and may mean that a company does not have any physical presence but if their sales revenue and/or number of sales transactions exceeds a certain threshold over a one year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax. These economic nexus standards are frequently changing and evolving and can be quite a pain to keep up with.

There are only two aspects of business activities used to assess whether businesses have economic nexus in a state:

  1. Sales revenue value – this can be thought of as invoiced revenue and not recognized revenue
  2. Number of transactions (if you operate a subscription model, note that every renewal counts as a transaction) - transactions can also be considered invoices

 

www.taxconnex.comhubfsEconomic Nexus Map July 2021

Some states use just one of these measures; others use a combination. There is some consistency between states as to the level of revenue and/or the number of transactions at which nexus is created. A good rule of thumb is $100,000 in revenue or 200 transactions. However, this is not accurate for all states, but it is what South Dakota originally enacted, and for many states has stuck.

 

Check out our economic nexus map to view the different thresholds in each state. 

See the map!

 
A further complication is that individual states can potentially use three different revenue figures and periods for calculating sales revenue value.

Revenue figures can refer to:

1
Gross Sales Revenue
All sales including tax exempt sales and exclusions.
2
Retail Sales Revenue
Any sale other than a sales for resale.
3
Taxable Sales Revenue
Only taxable sales, with tax-exempt or excluded sales tax not counted. 

 

The period for calculations can be:

  • Previous 12 months
  • Current calendar year
  • Previous calendar year

Even if you don’t yet meet the threshold in a state for economic nexus, business growth can, of course, mean that this changes at any time. It is therefore essential to monitor sales on a state by state basis at all times.

It is also vital to keep track of individual state legislative updates, as the situation is constantly changing. A useful resource is TaxConnex’s economic nexus map.

If you determine you have sales tax nexus, it doesn’t mean you have to register immediately. You’ll want to understand if your products/services are taxable and if you have the obligation to collect and remit sales tax.

 

States with No Sales Tax

There are 5 states that do not have a state-wide sales tax, they are considered the NOMAD states. New Hampshire, Oregan, Montana, Alaska and Delaware. Sales within these states do not need to be considered for sales and use tax purposes.

Learn more
no tax

Taxability

Taxability refers to whether sales tax applies to your sales or not. Generally speaking, tangible personal property is taxable and services are exempt – unless otherwise stated. The “unless otherwise stated” is a critical disclaimer. For example, certain products used in the medical field can be viewed as tangible personal property but are not taxable due to the type of product – there are many exemptions associated with the medical profession. Likewise, telecommunications “service” is one of the most heavily taxed services in a lot of states. Taxability can be confusing with software as well - is Software-as-a-Service taxable? It sounds like a “service” but by early 2019 more than a third of states were taxing SaaS delivered software. (Some have since stopped.) If you are a SaaS business, check out our SaaS map to determine where your solutions may be taxable.

Similar to nexus, laws are different across states for taxability.  Where companies get into trouble is applying taxability rules from one state to other states as they grow. You can review the statutes yourself; however, sometimes statutes require interpretation, and a sales tax professional can help you draw the right conclusions.

Taxability rules related to other digital goods and services vary from state to state as well. Part of the complication in conducting business in the US is the variability of rules from state to state. You can think of each state as a separate country – setting it’s own rules and laws.

Registering for Sales Tax

Once you’ve established nexus and determined that your products/service are taxable within a state, it’s time to get registered. If you are a business with a physical location and employees inside the US, this can be a relatively simple process, but for those with no physical location or employees, it can be a bit tricky.

The requirements vary greatly between states, and sometimes the application forms themselves are lengthy and complex. The information most commonly asked for in a sales and use tax permit application includes the the companies Federal EIN (Employer Identification Number), date the business first had taxable sales in the state as well as personal information including social security numbers of officers and potentially home addresses and copies of driver’s licenses as well.

Some of this information can be especially challenging for a foreign-based business.

If your business does not have an EIN, you can obtain this through various companies including EIN Express.

 

(The following information is provided with assistance from E-I-N Express) 

 

What is an EIN? An EIN is a unique nine-digit Employer Identification Number that is also known as the Federal Employer Identification Number (FEIN). Think of it as a unique identifier, similar to a Social Security number for individuals, specifically designed for business entities. The EIN is assigned to different types of US business entities by the Internal Revenue Service (IRS). An EIN can also be assigned to a non-US registered business by the IRS as well.

The primary purpose of this nine-digit number is to assist with tax-related matters, allowing the IRS to keep track of and oversee businesses that have obligations within the United States. Although EINs are commonly associated with U.S.-based businesses, foreign entities may also find it necessary to obtain one in order to comply with specific legal requirements and streamline their operations in the global business arena. Whether a business outside the United States needs a Foreign EIN depends on various factors, such as its activities, connections to the U.S., and specific regulations of the countries involved. 

If a US business owner has a Social Security Number (SSN), they can go to the IRS website and complete the online process to obtain the EIN for their US business entity. If a US or non US business owner does not have an SSN they can apply for their EIN via phone, fax or by mail. It is strongly recommended for US and Non US Business owners with no SSN to utilize an IRS Certifying Acceptance Agent (CAA) to handle the EIN application process and obtainment for them. 

Some examples where obtaining an EIN for a foreign entity may be necessary: 

  1. Nexus with the United States: If your foreign business engages in operations within the United States, such as having employees, opening bank accounts, or establishing a legal presence, you will likely need a Foreign EIN. It enables you to comply with tax obligations, file US tax returns, and ensure proper reporting to the Internal Revenue Service

  2. Compliance With U.S. Tax Withholding Requirements: In some scenarios , the U.S. tax law mandates withholding taxes from payments made to foreign businesses. Having a Foreign EIN facilitates this process and ensures compliance with tax regulations.

  3. Partnership with U.S. Entities: If your foreign business enters into partnerships, joint ventures, or other business arrangements with U.S.-based companies, having a Foreign EIN may be necessary to meet the reporting and compliance obligations of such partnerships.

  4. Compliance with Financial Institutions: Some financial institutions, including U.S. banks, may require a Foreign EIN for foreign businesses to show proper legal status in the US in order to open US business bank accounts or conduct financial transactions.

Find out more about obtaining an EIN at EIN Express


Once the FEIN is in place, then you can proceed with the sales tax registration. If completing the sales tax application online, each state will request a Social Security Number for a corporate officer or US employee as a responsible party. This can be a challenge for foreign-based businesses with no US representative and therefore no US Social Security Number. In this scenario, it’s possible to complete a paper application and/or call each state to complete the sales tax application.

Once the application has been completed and accepted, each state will assign a filing frequency.  This will usually be monthly, quarterly, or annual – although some states have semi-annual, bi-annual, and other filing frequencies. 

Registering for your sales tax permits is just the tip of the iceberg when it comes to managing your ongoing US sales tax obligations for foreign companies. Keep reading to understand how to get the correct rate on your invoice, as well as how to develop a process to remit your sales tax and remain compliant. 

Charging the Correct Sales Tax

Once you have determined that you are required to charge and collect sales tax, you will need to shift your thinking to HOW to charge and collect the correct sales tax. There are two primary pieces of information required to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules (as previously discussed).

Companies selling tangible personal property (generally subject to sales tax) across the country may only need access to current tax rates. They can subscribe to a tax rate service that allows them to lookup current sales tax rates, upload the tax rates into their invoicing/ERP system and let their invoicing/ERP system calculate the tax. This can work very effectively with minimal upfront or ongoing cost.

However, companies that are selling telecommunications services or software on a nationwide basis, where the taxability rules are varied and complex, a sales tax calculation software could be critical.

If you decide that sales tax calculation software is the better option, there are numerous companies you may consider. Today, most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model. These tools automate the sales tax calculation process by integrating with the shopping cart or invoicing system typically via an API (Application Programming Interface). When it comes time to create a customer quote or invoice, the shopping cart or invoicing system will pass certain data elements (customer location, product, sales amount, etc.) to the sales tax calculation system which will then calculate the sales tax and pass back the applicable sales tax. This is generally done in real time in sub-second intervals.

Be cautious, as software options appear to automate the sales tax process, and they do for calculation, but there are some that claim to automate the filing and remittance of your returns and taxes as well. However, they don’t remove all the work from your plate. For example, you must tell the sales tax software company what to do and when to do it: implementation of the technology, maintenance of the business assumptions and rules applied by the technology, updates and management of the tax calendar and the changing filing frequencies, managing of sales thresholds and expanding nexus footprints, taxability of new products and services, and response to jurisdictional notices.

It is important to have a process and dedicated support (whether that’s an internal person or team or an outsourced solution) to manage your filing and remittance.

Compliance and Reporting

In establishing a compliance process, you must consider multiple due dates including the 7th, 10th, 15th, 20th and the end of the month; multiple data sets from differing sales tax calculation solutions; managing and responding to notices; and addressing various payment options including ACH credit, debit, and physical checks for many local jurisdictions. This is why it's hard to rely on software to manage everything. There still needs to be a physical person to monitor, update and respond to different aspects of sales tax that a software can't do no its own. 

Some specific areas of compliance to consider having someone to manage are: 

Tax Data Reports

In a perfect world, all of your US sales tax for foreign companies calculations will be managed in one system, and you will be able to produce a single report each month that provides details with all of your sales and use tax liabilities. However, the reality is that businesses grow, they acquire other businesses, they change accounting systems, they launch new e-commerce platforms - all resulting in different sales tax processes. Be sure you have a process to gather the applicable data each month and reconcile this data to your general ledger before you start the filing process.

Format and Payments

Filing returns in paper format is still used by states for some level of taxpayers, but most states now use electronic filing for sales and use tax returns. The most common approach taken by states is web-filing, in which you log onto the state’s department of revenue website and input the required data into a web form. In some cases, you can import your data into the web form.

Payments are generally due on the same date as the return. Many states allow or even require electronic payment. If you are required to pay electronically and send a check, penalties could apply.

Maintaining a Tax Calendar

You should maintain a tax calendar that reflects where your business is registered for sales tax purposes, the filing frequency of each return (returns are typically due either monthly, quarterly, or annually), the e-file credentials (states often require an online filing with an electronic payment) and other state-specific information. (Remember to update this calendar as filing requirements change or you register in additional state or local jurisdictions. And if you miss a filing frequency change from quarterly to monthly and a return is late then you will be assessed penalties and interest.)

Notice Management

Jurisdictions enjoy sending you mail. Some of this mail may be informational but still critical. For example, you may receive a notice of a change in filing frequency from quarterly to monthly. If you miss this change, and skip two monthly returns, you will be penalized. Additionally, you may receive a deficiency notice that requires you to correct an issue. These deficiency notices generally have very tight time frames by which you must respond – 5 days, 10 days, etc. Many of these notices are posted within the states’ e-file sites where only a physical person will be able to identify their existence – software won’t search the e-file sites to identify open notices.

Controls

If you are a public company or have various financial covenants, you will have to thoroughly document your process including the various controls in place that ensure the process is executed effectively each month. These controls will also have to be reviewed periodically and tested to ensure proper operation. If you have other business activities on your plate and potentially won’t have enough time to manage this all by yourself, you may want to consider outsourcing the sales tax compliance process.

 

Managing all of this alone can be a lot for any size business, especially for one not based within the US. The amount of effort to keep up with tax rules in your own country is one thing, but adding the US and their complex and changing rules can cause a tax team a lot of stress. It’s imperative to have someone with the time and expertise to manage your sales tax obligations to ensure compliance in the event of an audit, non-compliance can lead to hefty penalties and fees for a business, or even you personally.

By outsourcing your sales tax obligations to a US sales tax expert, you can get sales tax off your to-do list and be able to ensure your compliance. If you're looking to talk to a US sales tax expert for your foreign company, get in touch! 

TaxConnex has been helping US and foreign-based companies maintain sales tax compliance for almost 20 years! We'd love to help you no matter where you are in the process!

About TaxConnex

TaxConnex® is a technology enabled sale tax service provider focused on delivering an outsourced sales tax department to businesses and corporations that have a multi-state sales tax responsibility and lack the sales tax knowledge and capability to manage on their own. TaxConnex helps eliminate the sales tax burden – no matter how many states you’re in or how often regulations change. Learn more at: www.taxconnex.com

 


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