Since most American sellers don’t understand the U.S. sales tax, it makes sense that foreign sellers would find it even more confusing. We’ll start by talking about the way the U.S. sales tax system works for customers from both inside and outside the country. Foreign vendors doing business in the United States will thereafter be provided with choices for sales compliance. Let’s get started!
How does sales tax work in the US?
General sales tax does not exist in the United States. Thus, the regulations governing the collection and distribution of sales taxes vary from one state to the next. There is a sales tax in all fifty states plus the District of Columbia. (Despite not being a state, Washington, D.C. collects sales tax in much the same way as any other state.)
Education, infrastructure, and public safety are all funded in part by tax revenue. The states are responsible for these matters, and there is a great deal of variation amongst them. This means that states may impose different sales tax rates and follow different procedures.
Should your company collect US sales tax?
If your firm has a physical location in a state or locality, you are required by law to collect, record, and remit sales tax on most products sold to consumers. This has to do with the state where your main office is, where your employees live, or where you keep your inventory.
A state’s physical presence nexus could be made up of any of the following:
- A place where your company can be found, like a warehouse, home office, or another place.
- Affiliates are individuals who direct clients to your online business in return for a commission on each purchase made by those customers.
- Personnel: In certain cases, things are connected thanks to staff members, salesmen, and even some independent contractors.
- Individuals engage in both the buying and selling of goods at a trade or craft exhibition.
- Drop shipping is when you negotiate an agreement with a supplier to have the provider deliver things to your clients directly, without going through you.
- Inventories: In most cases, a sales tax nexus is established when products are stored in a state to be sold there. Third-party fulfillment services, such as Amazon FBA, sometimes create sales tax nexus in the states where products are warehoused before being sent to customers.
When are foreign sellers required to collect US sales tax?
Generally speaking, states require businesses with sales tax nexus to collect sales tax for that state. There are many ways for non-American businesses to have a link to the United States.
- If a person resides in the United States and operates a company there, but is not yet a citizen of the country, they are permitted to collect sales tax. Those who are not citizens of the United States but who operate a company in the United States may nonetheless be regarded to have sales tax nexus and need to comply with the same sales tax legislation as residents of the United States.
- If any of a state’s nexus criteria are met by your non-American company, you will be compelled to submit an application for a state sales tax permit and start the process of collecting sales tax from every sales made in this state. You should determine where you have nexus : either a physical presence nexus (as explained above) or an economic nexus.
- Meeting economic nexus status can occur after your company have reached a specific volume of transaction or revenue threshold. In most US states the threshold for economic nexus is 200 transactions or $100 000 in sales over 12 months. Beware there are exceptions though !
- It is important to keep in mind that there is no general statewide sales tax in the states of Alaska, Montana, Delaware, Oregon, or New Hampshire. This indicates that you may be exempt from the need to collect sales tax in these states, irrespective of whether or not you have a physical position, personnel, or inventory in that state. Please note although none of these states have a general statewide sales tax, select sales in these five states are subject to tax ( it could be gross receipts tax, local resort tax, vehicle use tax..etc).
Tax rates vary depending on what you’re selling and where, and they are hundreds! Complexity of tax compliance can be bearing and difficult to follow without dedicating time and ressources. The tax environment is constantly changing. More than ever, companies are realizing that adopting a winning tax strategy is essential to long-term profitability. Tax management requires specialized expertise.
Choosing ASD Group means having a specialized team that will assist you on a daily basis and allow you to secure your business in the US and Canada.
If in doubt about your compliance, ask an ASD Group representative who will assist you.
This article is intended for informational use only and does not constitute legal, financial or tax advice. For specific advice applicable to your business, please contact us.