America is often called the Land of Opportunity, so let’s take the opportunity to understand their tax system. Churchill famously said that Americans always try to do the right thing after they’ve tried everything else – and it could be argued that they are still experimenting when it comes to taxes, since they are one of very few nations in the world who have not adopted a VAT or GST regime.

Sales tax in the USA is a consumption tax on the sale of goods and services, so in that respect it’s the same as VAT. But what makes this tax different is that it’s only levied on the final transaction with the customer – no one else along the supply chain has any charging or reporting requirements. Simply put: if you sell a product to a party that will use your good or service in some way to make their own supply, then US sales tax should not apply. Whether the transaction is B2B or B2C, it is a tax on the end customer only.

The tax is imposed at a state level, so there is no federal law which governs the tax for the USA as a whole. The first state to implement a sales tax was West Virginia in 1921 and since then, it has been adopted by 46 states (and is used in Washington DC, which – to confuse matters – is a federal district and not exactly a state).

Although the tax is charged by the state and local authorities, it is administered by the seller who is responsible for charging it. A merchant must charge sales tax if it has a ‘Nexus’ in the state, which is the USA’s fancy way of saying “a legal obligation to register and collect sales tax”.

Since each state is responsible for their own sales tax, there are 47 sales tax compliance regimes to consider. The rules vary widely around what products are taxable, how Nexus is created and what the reporting requirements are. However, probably the most difficult problem to solve is what rate of sales tax to charge… each state has a “headline” state rate, but there may be several local rates in the thousands of tax jurisdictions. Within a state, there are often multiple rates per special district, county, and city. Therefore, more accurate rates are determined based on address.

Once a seller works out what tax rate to apply, it will be necessary to file returns to each jurisdiction for which sales tax is collected. This all means it is virtually impossible to comply with US sales tax manually, and so merchants need to find a tech solution to automate the compliance process.