Insight
Entering the US market? State sales tax mistakes can be costly
April 2020
State sales tax rules can surprise businesses that sell into the US. While treaties between the US and other countries make federal tax laws straightforward, taxes on the sale of products and services can vary widely between jurisdictions. Not every state imposes sales taxes; where they do, there is little consistency or predictability when it comes to defining who is taxed, what is taxable, and how taxes are collected. This means businesses are frequently aware of their value-added tax (VAT) obligations but find it difficult navigating complex local taxes applying in different states and municipalities.
Fifty states but more than fifty systems
Currently , 45 states impose a sales tax. According to the Tax Policy Center, state general sales tax rates range from a low of 2.9% in Colorado up to 7.25% in California. Also, many municipalities within states levy a sales tax, pushing rates even higher. These taxes typically apply to sales of tangible personal property to state residents, but more states are taxing sales of services to raise additional revenue.
States vary widely in how they administer their sales taxes. Some states apply and collect tax locally, with cities or counties managing the collection process. But most states manage the collection centrally, at the state level. States place the responsibility for collecting and remitting taxes on sellers doing business in the state. Sellers can be liable for sales taxes that are not paid to the state, and subject to penalties and interest on outstanding balances.
Nexus — the connection that triggers an obligation
Sellers become obliged to collect and remit sales taxes when they have enough activity in a state to establish a connection known as nexus. Historically, this threshold was crossed when a seller established a physical presence in a state.
The US Supreme Court overturned the physical presence rule in the Wayfair case of 2018, supporting an expansion of sales tax jurisdiction based on economic nexus, a concept that lets a state require businesses to collect and remit sales taxes even if a business has no physical presence in the state. Many states that impose sales taxes have taken steps to expand their laws to recognise economic nexus when remote sellers cross a statutory threshold based on the number of sales or total dollar volume of transactions.
Activities that could establish a presence have become less and less substantial in recent years. For example, visits by salespeople, locations of servers for an internet seller, and acceptance of returns by a third party in a state could all trigger an unexpected sales tax obligation for a remote seller. These thresholds vary from state to state, which can compound the confusion and potential for error when businesses outside the US start selling products or services into the country.
Exemptions — not every product is taxable in every state
Sales tax exemption rules present another area of inconsistency and complexity among states. Many states carve out broad product-based exemptions for classes of consumer goods, such as food, prescription drugs, and non-prescription drugs. A product that is subject to sales tax in one state could be exempt in others.
In addition, most states allow some tax exemption on sales to resellers or manufacturers. The goal of these exemptions is to place the sales tax liability with the final consumer of the product, not with those involved in its manufacturing or distribution. States typically require the seller to collect and retain an exemption certificate from any buyer that would otherwise be subject to sales tax. This differs fundamentally from the VAT system, where tax is assessed at every stage along the supply chain, requiring each participant other than the end consumer to recover the VAT charged to them.
Get help from sales tax compliance specialists
Non-US businesses entering domestic markets put themselves at risk if they tackle difficult state sales tax compliance on their own. The sales tax landscape changes frequently, so if you’re considering selling products or services into the US, or already do so, it’s important you seek help from a consultant that focuses on these issues.
About the authors
Jaspal Dhillon
London, UK
Jaspal is the VAT Director at Lubbock Fine Chartered Accountants, the London member firm of Russell Bedford International, where he advises clients on VAT related to real estate, the international supply of goods and services, and a variety of other industry-specific issues. He previously worked for mid-tier and Big Four accounting firms and trained as a VAT inspector at Her Majesty’s Revenue and Customs.
JaspalDhillon@lubbockfine.co.uk
Steve G Horn
Atlanta, USA
Steve is a tax partner-in-charge of the Tax Planning and Compliance department and leads the International Practice at Williams Benator & Libby, LLP, Russell Bedford’s Atlanta member firm, while also serving on the board of directors of Russell Bedford International. Steve is the author of the firm’s tax planning updates and previously served on the editorial advisory board of the Harcourt Brace publication, CPA Internet Connection. He is also a frequent lecturer and guest speaker at universities, international conferences and professional associations.