- Sales tax rates are based on the location where the taxable sale is made or service is delivered and are a function of several components (state and local).
- The burden of sales tax is generally borne by the buyer, but the seller is responsible for collecting and remitting the tax to the state.
- A global organization may not have a permanent establishment in the U.S. but may still be responsible for collecting and remitting sales tax if it maintains substantial nexus in a state.
- Outsourcing sales tax compliance to a third-party provider can help you analyze compliance responsibilities, prepare for state audits, and navigate legal ramifications.
Does your global organization have an effective tax strategy for doing business in the U.S.?
Global organizations doing business in the United States often face challenges when complying with the rules of state and local sales and use taxes. States, municipalities, and localities can differ in their approach to taxation and rates — even on the same revenue streams — so a thorough understanding of state tax laws and regulations is critical for assessing your specific tax situation.
Learn some of the basics that can help your global organization stay in compliance and reduce the chance of penalties and fines.
General characteristics of U.S. sales tax
Sales tax is generally imposed on the retail sale of tangible personal property sold to the ultimate consumer of the property unless an exemption applies. Services are usually not subject to sales tax in the states unless they are specifically deemed taxable.
Although this appears straightforward, analyzing whether a product or service is subject to sales tax in a particular state or local jurisdiction involves many complexities. For example, technology-related revenue streams involve a detailed analysis due to numerous potential ways jurisdictions can tax them (e.g., electronically licensed software, cloud-based access to software, digital goods, electronically provided taxable services, etc.).
Additionally, services that are non-taxable on a standalone basis could be deemed taxable if they are somehow connected with the sale and delivery of taxable tangible personal property.
Differences between U.S. sales tax and value added tax
Take time to understand the differences between sales tax and value added tax (VAT) — it can affect pricing strategies, compliance requirements, and your overall tax liability. U.S. sales tax regimes are structured differently than VAT regimes, and concepts that apply to one may not apply to the other.
VAT is levied at each stage of the supply chain as value is added from the initial production until the product or service is acquired by the final consumer.
Sales tax is a consumption-based tax at the state and local (i.e., a locality can include a state’s county, district, or municipality) level that applies once on the transfer of tangible personal properties or specific services when products or services are sold at retail to the final consumer.
Whereas a VAT regime may allow for credits or refunds on VAT paid on a myriad of business expenses, sales tax generally does not allow for such credits because it is only applied once at the retail point of sale. As such, the retail seller of the taxable revenue stream collects sales tax from its buyer but does not pay any sales tax to its suppliers on any direct inputs.
Assess physical and economic nexus
Nexus is the connection between a company and a state or local tax jurisdiction that triggers tax obligations in that jurisdiction. Global organizations may have nexus in multiple jurisdictions, which can make it challenging to determine their tax liabilities and tax collection responsibilities.
For a global organization to have a sales-and-use-tax filing requirement in a jurisdiction (and therefore a requirement to collect from the end consumer and remit to the tax authorities), it must have substantial nexus within that jurisdiction. Substantial nexus exists if a taxpayer has some form of physical presence (whether fixed or transitory) or a specific economic presence as determined by the jurisdiction.
Physical presence is established by the existence of an office (leased or owned), inventory, or employees in the jurisdiction (either residing or traveling in the state for business purposes). Physical presence can also be imposed on an organization if it maintains independent contractors or affiliated entities acting in the jurisdiction on the organization’s behalf. Some state take the position that being in the state for as little as two or three days creates substantial nexus.
If physical presence does not exist in a jurisdiction, substantial nexus may still be established if an organization maintains a certain economic presence, such as sales volume, number of transactions, or total revenue.
While thresholds for determining economic presence vary, most states require out-of-state sellers to collect and remit sales tax if they have more than $100,000 in sales or 200 transactions each year. It’s important to track these thresholds and monitor your remote sales and transactions in each state to remain compliant with economic nexus laws. Failure to do so can result in penalties and other legal consequences.
Considerations for analyzing compliance
State and local tax laws and regulations can change frequently, so global organizations should monitor changes and adjust their tax strategy accordingly. You may want to outsource your sales tax compliance to an experienced third-party provider, such as a tax consultant or CPA firm. A professional tax team can help analyze your U.S. sales tax compliance responsibilities, be prepared for state and local audits, and navigate legal ramifications of doing business in the Unites States.
Keep these facts in mind when determining next steps:
- A global company may be required to invoice and collect both state and local sales taxes on its taxable sales.
- The burden of sales tax is generally borne by the buyer; however, that does not alleviate the compliance burden on the seller to collect and remit that tax to the state or locality.
- Sales tax rates are often a function of several components (state and local) and are based on the location where the taxable sale is made or service is delivered.
- If an organization’s sales are subject to tax, but its customers are otherwise exempt (e.g., resellers, state and local municipalities, purchasers of exempt agricultural or manufacturing equipment), the organization is still responsible for collecting a specific and valid Exemption Certificate from its customers.
- To register for sales tax collection, states generally require organizations to have a U.S. bank account, a federal employer identification number, and for its officers or directors, a federal individual taxpayer identification number or social security number. These items may be difficult to obtain for global companies whose only U.S. presence are sales into the states.
- It is important to realize that federal U.S. income tax treaties with countries generally have no implications on whether states can impose their sales and use tax regimes on global organizations.
- A global organization may not otherwise have a permanent establishment in the U.S. (and thus no federal income tax liability), but if it maintains substantial physical or economic nexus, it will still be responsible for collecting and remitting sales tax, where applicable.
- If a global organization sells solely through a “marketplace facilitator” (e.g., Amazon), it may not have sales tax collection responsibilities in various states, so long as the marketplace facilitator is properly collecting and remitting the tax for the organization. Global organizations that utilize marketplace facilitators should assure that in the case.
- Beyond sales tax responsibilities, a global company that registers to collect sales tax in a state should analyze whether it (or its owners) may also be subject to other state tax types in that state (e.g., state and local net income taxes, gross receipts taxes, net worth taxes, and minimum taxes and fees).
How we can help
Whether your needs are business or individual, international or local, our professionals can help you plan ahead, apply tax planning strategies, and understand and comply with applicable tax laws.
CLA provides multistate tax consulting services to global organizations that are constantly developing products and services, and adding new customers and markets. Our team can help assess your specific tax situation, analyze your compliance systems, and evaluate emerging opportunities.