What Non-USA Based Online Sellers Need to Know about U.S. Sales TaxSeptember 28, 2016 in Fulfilment By Amazon, USA Sales Tax, VAT
The U.S.’s sales tax system is complicated for U.S.-based sellers to understand, so it stands to reason that international sellers would find it a real quagmire!
This post will explain the basics of U.S. sales tax for non-U.S.-based sellers and point toward some resources to help you better understand sales tax and become sales tax compliant.
But first, a brief run down on U.S. sales tax.
U.S. Sales Tax, Explained
There is no national sales tax in the U.S. Instead, sales tax is governed at the individual state level. Forty-five U.S. states and the nation’s capital, Washington D.C. (which is a “district” but operates like a state for the purposes of sales tax) have a sales tax. Five U.S. states do not have a sales tax.
States use sales tax revenue to pay for state budget items that are governed at the state level, such as roads, public safety departments and schools.
Because sales tax is governed at the individual state level, sales tax rules and laws can vary quite a bit from state to state.
Just one example is groceries. Some U.S. states tax groceries, while others consider groceries to be tax exempt.
Another example is the taxability of shipping charges. Some U.S. states consider the fee you charge your customer to ship their items to be taxable, while others do not.
In other words, when you deal with sales tax in a state, you have a relationship with that individual state. You can find out more about sales tax in each U.S. state here.
Who Has to Collect U.S. Sales Tax?
In the U.S., states can only require merchants to charge sales tax if that merchant has “nexus” in the state. Nexus is just a fancy way of saying “significant presence” in a state. Some factors that create nexus include:
A physical presence – a home office, office, store, factory, warehouse, or other location
Personnel – Employees, salespeople, installers and even some contractors
Affiliates – Someone who sends business to your online store in exchange for a cut of the profits from that sale
Drop shipping – A relationship where you have a supplier ship inventory to your customer
Inventory – Storing goods for sale in a state creates sales tax nexus. This type of nexus applies to online sellers who use 3rd party fulfillment services like Amazon FBA
If you have sale tax nexus in a state, you are required to register for a sales tax permit with that state’s tax department (usually called the “[State] Department of Revenue,”) then collect sales tax on taxable sales from all of your customers in that state.
Once you register for a sales tax permit, the state will assign you a sales tax filing frequency. This is generally monthly, quarterly or annually. As a general rule of thumb, the higher your sales volume in a state, the more frequently you will be required to file a sales tax return.
When your sales tax filing due date rolls around, you’ll be required to figure out how much sales tax you collected from your customers in each individual state. Not only that, but most states also require that you break down your sales transactions by local areas within the state. These local areas are usually broken down into county, city, and other special taxing districts. Fortunately, sales tax automation technology can link with your online shopping carts and marketplaces to make sales tax filing simpler than ever.
That was the short rundown on sales tax in the U.S. For more information, check out our Sales Tax 101 for Online Sellers guide.
When Do International Sellers Need to Deal with U.S. Sales Tax?
If you have sales tax nexus in a state, the state considers you liable to collect sales tax from your buyers in the state. Let’s look at a few scenarios where non-U.S. sellers would (and would not) have sales tax nexus in the U.S.:
You live outside the U.S. but have sales tax nexus in a U.S. state – If you meet any of the criteria for nexus in a U.S. state, then that state requires that you register for a state sales tax permit and collect sales tax from buyers in the state. (Note: Never collect sales tax from U.S. buyers without a sales tax permit. States consider this unlawful!) Keep in mind that 5 U.S. states don’t have a sales tax. If you only have nexus in one of these 5 states – Alaska, Delaware, Montana, New Hampshire, Oregon – then you are not required to collect sales tax.
You live and run your business inside the U.S. but are not a U.S. citizen – Non-U.S. citizens running a business in the U.S. are still considered to have sales tax nexus and are required by states to abide by sales tax laws just like U.S. citizens.
You live outside the U.S. and have no sales tax nexus in the U.S. – Congratulations! In this scenario, you do not have to worry about registering for a sales tax permit with a U.S. state and collecting sales tax from U.S. buyers. If you have no nexus in any U.S. state, you do not have to collect U.S. sales tax.
How Can Non-U.S. Sellers Become Sales Tax Compliant in the U.S.?
Becoming compliant with U.S. sales tax is not simple for international sellers. But if you are attempting to get compliant, these tips and resources should help you.
Determine where you have nexus – Use the guidelines above to determine in which states you have nexus. If you sell on Amazon FBA, you can pull an Inventory Event Detail report to see in which states your Amazon FBA inventory is stored. You can also sign up for a 30-day free trial of TaxJar and see from which states your inventory has recently shipped.
Register for a sales tax permit in your nexus state(s) – This can get tricky for non-U.S. sellers. Most states require that you have an Individual Taxpayer identification Number (ITIN.) You may also be required to fill out a paper sales tax form and mail it in. Many states’ online systems cannot adequately handle sales tax permit applications from outside the U.S. You may also be required to call the state to handle registration issues, which can become onerous if there is a large time zone difference.
Open a U.S. bank account – Most U.S. states also only accept sales tax payments via Automated Clearing House (ACH) transfer from a U.S. bank. So you may be required to open a U.S. bank account. For security purposes, this usually requires either you or a representative of your business to be physically present in the U.S. when opening the account.
Sales Tax Resources for Non-U.S. Sellers
Fortunately, there are sales tax experts who specialize in helping online sellers get sales tax complaint in the U.S.
Two vetted U.S.-based experts tax firms are:
You may also find a sales tax firm in your home country that can assist you with becoming sales tax compliant in the U.S.
I hope this blog post has pointed you in the right direction when it comes to U.S. sales tax compliance. If you have questions or something to say, start the conversation in the comments!
TaxJar is a service that makes sales tax collection, reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!