It’s therefore essential that businesses understand US sales tax compliance, from understanding what it is to navigating the economic nexus and marketplace facilitator laws.
What is sales tax?
Sales tax is a levy imposed on the sale of goods and services. Unlike value-added tax (VAT), which is common in many other countries and applied at multiple stages of production, US sales tax is typically only collected at the final point of sale to the end buyer.
It’s important to note that there is no national sales tax in the US. Instead, sales tax is governed at the state and local government level. Currently 45 states and Washington, D.C. have a sales tax and many local jurisdictions within these states also have a local sales tax. Only four states (Delaware, Montana, New Hampshire, and Oregon) do not have a sales tax (Alaska technically doesn’t have a state sales tax either but it does have local sales tax).
Sales tax rates and regulations vary significantly from state to state and differ again within local jurisdictions. This makes compliance a complex endeavor for e-Commerce sellers operating across the US.
Economic Nexus
In the past, the concept of nexus (the connection between a seller and a taxing jurisdiction), was primarily based on physical presence. However, Economic Nexus Laws have emerged as a game-changer, particularly following the landmark Supreme Court ruling in South Dakota v. Wayfair, Inc. (2018). In this case, the Supreme Court ruled that a business does not need a physical presence in a taxing state for the state to impose a duty on them to collect and remit sales and use taxes.
Economic Nexus Laws consider factors such as sales revenue or transaction volume within a state to determine whether a seller is obligated to collect and remit sales tax.
This means that even if you do not have a physical presence in a state, you may still be required to comply with sales tax obligations if you meet certain economic thresholds.
To date, all 45 States and Washington D.C. have introduced Economic Nexus Thresholds, typically of a transaction value of USD 100,000 per year or of a transaction count of 200.
Marketplace Facilitator Laws
To streamline sales tax compliance and ensure the collection of tax revenue, many states have implemented Marketplace Facilitator Laws. These laws shift the responsibility for collecting and remitting sales tax from individual sellers to online platforms or marketplaces such as Amazon or eBay.
As a result, if you sell through one of these platforms, the burden of sales tax collection and remittance may fall on them rather than on you as the seller.
While Marketplace Facilitator Laws offer some relief to individual sellers, it is essential to understand the nuances and requirements specific to each platform and jurisdiction.
In addition, if you sell through marketplaces and other channels into a state, you may still be required to register in that state and collect tax on sales which are not taxed by a marketplace facilitator.
Registering for sales tax and ongoing compliance
If you establish a nexus in a state, whether through physical presence or economic activity, you will be required to register for a sales tax permit with the state’s taxing authority.
The registration process varies by state but involves completing an application, providing business information, and obtaining a sales tax permit. Sellers will also need to register with the Internal Revenue Service (IRS) to obtain a Federal Employment Identification Number (FEIN) first before they can apply for any sales tax permit.
Once registered, you must collect the appropriate amount of sales tax from customers at the time of sale, maintain accurate records of sales tax collected, and remit the tax to the relevant state taxing authority regularly.
Staying compliant also means staying informed about changes in tax rates, regulations, and filing requirements, and maintaining proper documentation to support tax filings and audits.
Conclusion
In conclusion, while the prospect of tapping into the US market holds immense promise for ecommerce sellers, navigating the intricacies of US sales tax compliance is essential for long-term success.
By understanding sales tax fundamentals ecommerce sellers can navigate the complexities of US sales tax laws with confidence and ensure their continued growth and success in the US market.
Still not sure? Tax Desk offers a complete US sales tax compliance solution to help you sell into the US market and minimize your compliance burden and cost.
Get in touch with us at info@taxdesk.com for further information or to discuss your requirements with one of our experts.
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