Tax is complicated. We don’t expect you to understand it, but you need to understand what your obligations are and how that can affect the success of your online business in the USA. We’ll keep things very simple, but let’s take a short trip down the rabbit hole of eCommerce sales tax…
In general, there are two taxes to worry about: tax on your profit and tax on your transactions.
A government can only tax your profit if your business is “tax resident” in their country. In 99% of cases, only the country or state where your business is established can tax your profit. This means that most of the time, selling to customers in another country or state won’t create this kind of tax problem.
But we all know tax offices are greedy and they want their slice of your pie, and the weapon they use to get this is consumption tax – which is a tax sellers must charge the consumer on individual sales. Regardless of whether your shop makes a profit, there will be circumstances when you will be legally obliged to charge a “sales tax” whenever you sell your product online.
This tax that is added to your sales price goes by many names: VAT is the most popular globally, GST is common as well, but the USA likes to be unique, and they have their own thing called Sales and Use Tax. Even though this is technically a tax on the end customer, the tax man has the right to force you to collect the tax on his behalf.
To do this, they create laws that – when certain criteria are met – oblige a seller to register for the sales tax in their tax jurisdiction. Not registering is illegal, so it is important to understand what the rules are because the tax office has ways of punishing you.
Once registered, effectively you become a tax collector for the government by charging the tax to the consumer at the point of sale (at checkout) – and then you need to file a tax return to report all this tax you have charged and pay it over at the end of the month.
Every country around the world has their own rules for taxing online sellers – Europe has VAT and USA has sales tax. There are 44 countries in Europe and 47 states in the US (that have a sales tax system), so it is important to understand each tax office’s specific legislation to know if and when you need to register and start charging sales tax.
If you online business is successful in the USA, sales tax is an issue you can’t ignore. Luckily, there are automated solutions available to make the process of registering and charging tax simple. It also helps to have someone behind the tech who can explain things to you and offer practical and commercial advice as your business continues to grow.