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In our US market entry guide we discuss entity choice and how those choice may benefit or adversely impact you as you grow. Understanding state sales tax is just as critical. Expanding into all US states at once can be a compliance nightmare. There can be sense in choosing to launch initially in a limited number of states.
This is because one of the most complex and burdensome issues that face international businesses entering the US market is the application of sales tax. The first thing to understand is that sales tax is the responsibility of each individual state, with each state having its own tax code. This means that each individual state governs how it levies sales tax. For businesses with customers and operations spanning across multiple states, it is important that you are aware of the application of the rules in each state to ensure that you are compliant.
In this post, we will try to break down the basics of understanding sales tax in the US to help you determine whether your business will need to collect sales tax on its operations in the US.
What is sales tax?
Sales tax is a tax imposed by states on retailers selling tangible property in such state. The onus is generally on the seller to collect and remit sales tax to the relevant state authority. The general rule is that a business that has created a “sales tax nexus” in a state it is responsible to charge and collect sales tax.
We note that Alaska, Delaware, Montana, New Hampshire, and Oregon do not have sales tax. This means that even if your business has created a sales tax nexus in these states, you won’t be required to collect sales tax.
What is sales tax nexus?
Put simply, sales tax nexus is where your business has a substantial enough presence in a state for the state authorities to deem that you are taxable in such state. It is important to note that as each individual state governs their own application of sales tax, what will create a sales tax nexus in one state will not necessarily create a sales tax nexus in another.
General examples of what will create a sales tax nexus includes:
- Having a physical presence in a state (including offices, warehouses, stores)
- Having staff or personnel resident in a state (including salespeople and in some cases contractors)
- Fulfillment warehouses (for online retailers it is important to understand where the product is fulfilled and warehoused)
- Selling products at trade shows
- Holding inventory in a state
International sellers that are selling products to US based customers should first consider whether they have created a sales tax nexus. In certain circumstances, foreign businesses that do not create a sales tax nexus will not be required to register for sales tax permits or need to collect sales tax from its customers.
I think my business has a sales tax nexus, what next?
If your business has created a sales tax nexus in a particular state pursuant to the sales tax rules of such state, you will be required to register for a state sales tax permit and collect sales tax from all buyers in that state. The sales tax permit is obtained from the relevant state tax department.
Upon receiving the sales tax permit you will be assigned a sales tax filing ‘frequency’ requiring sales tax filing to be made monthly, quarterly or annually. Again, each state has its own requirements and criteria in determining the filing frequency.
It is important to note that the process of determining whether your business has created a sales tax nexus and therefore is required to register for a sales tax permit, is of particular importance as failing to obtain a sales tax permit is deemed as criminal fraud.
What sales tax rate does my business charge?
To add to the already complex and cumbersome framework for sales tax, the rate at which sales tax must be charged is determined by whether a state is an “origin-based” state or a “destination based” state.
In an origin-based state, sales tax should be collected based on the sales tax rate where the seller is located. In a destination-based state, the sales tax rate will be that of the state in which the customer made the purchase.
How we can help
Navigating through the sales tax rules can become an overwhelming process when trying to focus on the growth of your business in a new market. If you need assistance in analyzing whether your business has a sales tax nexus in a state and whether you are required to be sales tax compliant, please don’t hesitate to get in contact with a member of our team.