Taxes are complex, no matter where you live in the world. But in the US, it gets even trickier because each state makes its own rules and regulations around sales tax. This makes it difficult for UK sellers to know their sales tax obligations when selling in the US.
This guide will explain what UK sellers need to know about US sales tax and whether they must pay and file sales tax returns in certain states.
US sales tax is applied to goods and services and is generally a percentage of the sales price, usually between 4 and 8%. It’s paid by a customer during the checkout process, collected at the point of sale by the seller, and later remitted to the state by the seller to be spent on budget items.
Sales tax is also called a “pass-through tax” or a “consumption tax” because buyers only have to pay sales tax on items or services they buy.
Forty-five US states and Washington DC all have a sales tax. Because of how the US government is set up, each state makes its own laws, rules, and regulations concerning how much sales tax to charge, which products are subject to tax, and how sellers and businesses should collect and remit sales tax.
As mentioned above, there is no national sales tax. Instead, each US state governs it at the state and local levels.
While known as the main taxing authority in the US, the Internal Revenue Service (IRS) has nothing to do with sales tax. Each state’s taxing authority, typically called the Department of Revenue, governs sales tax obligations and compliance for businesses.
Besides the fact that sales tax is governed at the state level, US sales tax differs from VAT and tax in the UK in several ways. Here are just a few:
Businesses selling in the US must collect sales tax if they have reached “sales tax nexus” in a state. Nexus refers to having a connection to a US state, which can be anything from having a physical presence, like employees or inventory in a state, to an economic connection (economic nexus).
Economic nexus occurs when companies have reached a certain number of transactions or revenue in a state. In most states, the economic nexus threshold is $100,000 in sales per year or 200 separate sales transactions per year, though it varies by state.
If you have a physical or economic tie to a state and have reached a threshold, you must register with that state for a sales tax ID, collect sales tax from your customers, and file sales tax returns.
Sales tax rates in the US are a combination of state and local tax rates. Some states, like Rhode Island, have a single tax rate. However, in most states, local jurisdictions, such as cities and counties, can levy their own sales tax rates.
Here’s an example:
| Sales Tax Jurisdiction | Sales Tax Type | Sales Tax Rate |
|---|---|---|
| Colorado | State | 2.9% |
| Boulder | County | 1.185% |
| Longmont | City | 3.53% |
| Greater Denver Regional Transportation District | Special Taxing District | 1% |
| Scientific and Cultural Facilities District | Special Taxing District | 0.1% |
| Longmont, CO Total Combined Sales Tax Rate | 8.715% |
Why is this important to know as a UK seller or business? The US tax system taxes sales tax at the point of sale, which tends to be the buyer’s ship-to-address. Because of how US sales tax works with combined rates, there are over 13,000 taxing jurisdictions.
The best way to handle sales tax in the US as an international seller is by using an automated sales tax solution like Zamp. These solutions handle everything for you from nexus tracking to sales tax calculations for your storefront or website to registrations and filing.
Every state decides what products are taxable or not. Most everyday items, like toothpaste or a tooth brush, are considered taxable in the US.
But there are some necessities, like clothing and groceries, that are considered non-taxable by certain states. These variations in taxability can make collecting sales tax challenging if you don’t know what items to charge tax on or not.
As we’ve discussed, each state makes its own sales tax laws, and because of this, filing and remittance are different in every state. For some states, it can be as easy as a simple one-page form online. For others, it requires filling out extensive documentation on how much sales tax you collected from buyers in each jurisdiction in that state.
Filing requirements also vary from state to state. The majority of states will assign merchants a filing frequency based on sales volume to buyers in that state. Filing frequencies are either monthly, quarterly, or annual.
It’s important to note that states also have different due dates for payments and filings. Typically, most states require merchants to file and pay sales tax by the 20th of the month, but other states require filings and payment on the 15th or 23rd of every month. It all just depends on the state, and that can make it difficult for UK stores selling into the US.
The answer will mainly depend on nexus (physical and economic). If you reach nexus in a state, you’re required to register, collect, and pay US sales tax there.
Remember you can reach nexus if you have a physical presence, such as an office or warehouse, or exceed an economic threshold.
There are several steps you should take to determine if you need to become US sales tax compliant.
In addition, you may need to apply and register for a US Individual Taxpayer Identification Number (ITIN) to contact the state by phone or email to register. Most states will also not allow merchants with an international address to register online.
UK merchants selling into the US face a myriad of challenges thanks to the US sales tax system. Ensuring you’re compliant in the states where you do business will help you avoid hefty penalties and fines that come with non-compliance.
Speaking with a sales tax expert like Zamp ensures your business stays compliant and you never have to worry about the day-to-day of sales tax management.
Questions around US sales tax compliance? Zamp is happy to help. Get in touch with their team to learn more today.
This article was written for SimplyVAT by our Partner, Zamp.
