This guest post has been written by our partners at TaxJar.
The Basics of U.S. Sales Tax Growing International Retailers Must KnowJanuary 10, 2022 in Ecommerce Tips, Tax Jar
Global commerce is nothing new – after all, Marco Polo was making his way along the Silk Road in the 13th century. But the proliferation of e-commerce (and technologies that make e-commerce easier to manage) has made it exponentially easier for companies to expand to new global markets. Many companies based in Europe look to the U.S. as fertile ground to grow their customer base and revenue, and while this can be a smart strategy, it comes with its own set of challenges. One of those challenges is the labyrinth that is the U.S. sales tax system.
What is the sales tax landscape in the U.S.?
International sellers are probably familiar with Value Added Tax (VAT). VAT is a broad tax on goods and services that are consumed in the EU and other countries.
Unlike the U.S. sales tax system, the VAT system is a multi-stage tax imposed at every step of the supply chain. VAT is due in the country of consumption regardless of the country of the seller, which makes imports from the U.S. subject to VAT when consumed in Europe. Similar to U.S. sales tax, VAT rules are complex and can become tedious when applied to specific transactions and cross-border transactions.
Sales tax in the U.S. is a tax paid on the final sale by the consumer to the business that remits the sales tax to the appropriate state. The state the sales tax is remitted to is determinant on whether it’s an origin-based (a charge at the tax rate of the seller’s location) or destination-based (a charge at the tax rate of the buyer’s location) state. There are exceptions, but most remote sellers collect at a destination-based rate. This is called sales tax sourcing.
Think of the business as an intermediary. When sales tax management is done correctly, businesses simply hold the sales tax paid by the consumer and pass it onto the state when sales tax is due. A business should never pay sales tax out of pocket. Because of this, sales tax is often called a “pass through tax”.
Let’s talk nexus
U.S. sales tax is rooted in a concept called sales tax nexus. Sales tax nexus occurs when your business has some kind of connection to a state. These connections can come in two different ways. One is through physical nexus. Physical nexus is exactly what it sounds like, a physical presence in a state. This can be an office, an employee working in the U.S., or a warehouse.
The second way to create this connection to a state is through economic nexus. This is not as straightforward. Economic nexus is when a business makes a certain amount of sales in a state (either a certain dollar amount or a number of sales transactions). A business never has to physically be in a state and can still reach economic nexus there. This is a result of a 2018 Supreme Court ruling, South Dakota v. Wayfair, that gave states the power to create economic nexus laws.
Let’s use an example. In Kentucky, any seller (U.S. based or international) who makes more than $100,000 in sales in the state in the previous or current calendar year, or who made more than 200 sales transactions in the state in the previous or current calendar year, is required to comply with Kentucky’s sales tax laws. Compliance means registering for a Kentucky sales tax permit and collecting sales tax from any buyers in Kentucky.
What makes sales tax complex is the fact that all states have different definitions of nexus. And while you only have to charge sales tax in the states in which you have nexus, keeping up with different laws to ensure you are compliant can be time consuming. This is just one state’s sales tax law. If you are selling into 20 different states, you need to research their specific economic nexus laws and register for a sales tax permit in the states you have met nexus. This is the first step to begin collecting sales tax from your customers.
What about warehouses and FBA?
Another concept to be aware of is marketplace facilitator laws. In the U.S.,marketplaces like Amazon or Etsy are required to collect sales tax on behalf of sellers on their platform. So if you make sales on Amazon in the U.S., they are collecting that sales tax for you. Great news for sellers, but…
Even if you only sell on Amazon, you still need to be thinking about sales tax. That’s because storing inventory in an Amazon warehouse can create physical nexus, which puts you back on the hook for sales tax in that state. You may still need to register for a sales tax permit.
Is that it? Am I ready to sell into the U.S.?
Almost! One more thing for international sellers to note is import taxes. In the U.S., anytime a product over the value amount of $800 is being imported, import taxes are owed to the government.
The amount of import tax owed depends on the product. For this, you’ll need to consult the Harmonized Tariff Schedule of U.S.,HTS). These are codes used by the U.S. government to classify goods being imported into the country. Each type of product is assigned a different code, and a different import tax.
How TaxJar can help
The good news for international sellers is that TaxJar can help collect both VAT and U.S. sales tax. The TaxJar API supports sales tax and VAT tax calculations in 31 countries, including the US, Canada, Australia, the European Union, and now, the United Kingdom. Here’s a great resource on how we can support sellers looking to expand internationally.
Contact a member of the TaxJar team today and see how we can help you stay compliant now and in the future.