The Basics of U.S. Sales Tax for Multinational Businesses
By Emily Zhou, Senior Associate, Tax
Many of our clients and prospects who are based outside the U.S. but have activities here are surprised by the nature and complexity of the U.S. state sales tax regimes. As we’ll see, sales tax requirements on businesses not only vary by state, they differ significantly from similar requirements found in other countries throughout the world.
This post outlines the basics of U.S. state sales tax. The information applies to any business — U.S.- or non-U.S.-based, online or brick-and-mortar — that sells to customers in the U.S.
U.S. Sales Tax: It’s Not the Same as VAT
Sales tax is levied on sales to consumers in most U.S. states. Sales tax is similar to value-added tax (VAT) and goods and services tax (GST), which are commonplace around the world, but there are significant differences. For example, in some states, sales tax applies only to the sales of tangible goods, and only to a limited extent to certain types of services. VAT and GST, on the other hand, almost always apply to both goods and services.
In addition, sales taxes are paid only by the ultimate purchaser, although the requirement to remit them rests with the business. Generally, wholesalers in the U.S. are not required to collect and remit state sales tax, because wholesalers don’t sell goods to the ultimate purchaser. This process is distinct from VAT and GST regimes, in which taxes are collected at each level of the supply chain.
Wholesalers must obtain resale certificates that document their exemption from paying sales tax. A wholesaler will collect copies of resale certificates from its customers, which confirms that it need not collect sales tax for that particular transaction. This ensures that sales taxes are imposed only once in U.S. states — on the ultimate customer.
It’s worth emphasizing that while most U.S. states charge sales tax, there are exceptions. Sales tax either does not apply or applies only in certain circumstances, for example, in Delaware, Oregon, New Hampshire, Montana and Alaska.
Sales Tax Nexus Explained
“Nexus” refers to a taxable connection to a state. If a business creates nexus in a particular state, it must collect sales tax from its customers in that state.
While each U.S. state has its own rules determining what creates sales tax nexus, there are common triggers. Here are some factors that may create nexus in U.S. states that have a sales tax:
- Selling tangible products in the state
- Maintaining a physical location, such as a store or warehouse, in the state
- Having personnel in the state
- Transacting business through affiliates, such as Amazon, which may provide warehousing services or shipping services in the state
- Carrying on a certain level of sales in the state, even if online or through the mail
New Sales Tax Requirements for Businesses That Sell Online
Until recently, companies that sold to U.S.-based customers in general did not need to collect sales tax in states where they had no physical presence. That changed in 2018, when the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc.that a state can collect sales tax from companies with economic nexus in that state, even if the companies do not have a physical presence there.
E-commerce businesses, then, are in some cases now required to collect sales tax in certain U.S. states and remit them to local authorities, even if they don’t have a physical presence or affiliate nexus as described above.
Determining If You’ve Created Nexus in a U.S. State
Because each state has unique laws related to sales tax (and some don’t have the tax), determining whether or not you’ve created nexus is not always straightforward. Generally speaking, if your business sells tangible products in a state — or if you’re conducting any of the other nexus-creating activities mentioned above (e.g., having personnel in a state) — you’ll need to collect sales tax from your buyers in that state. You may also need to collect sales tax if you provide certain services, depending on the particular services and the state where they’re provided.
The bottom line is you must understand your activities in all states where you sell to customers, and understand what constitutes nexus in each of those states to make determinations about whether you’ve created nexus.
Collecting and Remitting State Sales Tax
A business needs a sales tax permit before collecting sales tax in any U.S. state. The permit allows the business to collect, report and remit sales tax on taxable items. For each particular transaction, businesses must generally show the amount of sales tax separately, so the customer can easily determine the amount of tax being charged. For businesses that make online sales, the “shopping cart” page should show this sales tax calculation.
Businesses must also of course remit collected sales taxes to the appropriate state authorities. Depending on the state and the amount of tax collected, your business may be required to remit on a monthly, quarterly or annual basis.
Filing Sales Tax Returns
If your business collects sales tax in a state, you’ll almost certainly be required to file a sales tax return to report the taxes collected. Individual states typically assign businesses a sales tax filing frequency (e.g., monthly, quarterly or annually) at the same time they issue sales tax permits. Each state will also inform the business of sales tax filing due dates and generally provide an account number so the business can file sales tax returns online.
Tracking Activities and Understanding Obligations and Risks
Sometimes a business’ strategic decisions or sales patterns mean that its sales tax nexus in a particular state will terminate. In such cases the business should notify the state to ensure that it is no longer required to file sales tax returns.
It should be said that reviewing the activities of a business in each state to determine whether filing obligations exist can be complex and represents a significant administrative burden, particularly considering that sales tax regulations vary by state and that those regulations are evolving quickly to account for electronic commerce and other factors. Needless to say, the burden of actually collecting and remitting taxes, and making regular filings with each state, is also significant.
Unfortunately, the risks of noncompliance with state sales tax laws are high. States are tightening enforcement, particularly in connection with online transactions in the wake of the recent Wayfair decision. As a result of these risks and associated administrative burdens, businesses are increasingly turning to third-party experts (such as Vistra) who will explain their sales tax obligations and related risks based on their own unique activities. These experts can even assist with online registration and sales tax filings.
However you decide to manage your business’ U.S. sales tax obligations, it’s critical that you don’t ignore them and that you fully understand your options and related risks.
To learn more about the U.S.’s evolving tax rules — including those affecting corporations and individuals — register for our webinar Expanding Internationally? You Need to Consider Recent Tax Reforms.