Sales Tax Compliance Essentials

How to sell compliantly to the US

If you sell to the US (or plan on entering the market), you will need to understand US sales tax. Sales tax is very complex – there are 47 states who all have their own rules, but if you understand the basics, you’ll at least know the right questions to ask. The questions below give you a head start…

Want to know something that isn’t dealt with below? Feel free to reach out and we’ll give you a hand.

Ask Us anything
Yonda-US-sales-Tax-Solutions

IF YOU DON’T ASK, YOU DON’T GET…

What is US Sales Tax & why do online sellers need to worry about it?

Sales tax is a tax placed on the sale of goods or digital products, collected by a seller at the time of sale. Forty-six U.S. states and D.C. have a sales tax, and since it’s governed at a state level, each state gets to make its own rules..

Selling across the US is a massive growth opportunity for your online business, but whether you are based in the US or not – you might have to register for sales tax in some states, charge sales tax to your customers and pay it to the tax man. This will depend on your sales activity and business model.

Failing to register could mean your business is operating non-compliantly, so it’s crucial that you understand your obligations so you don’t risk losing all your US customers.

Do I have to register for sales tax?

US businesses that sell taxable products will usually have to register in their home state, but even non-US sellers might also have obligations in multiple states depending on their activity and supply chain.

Here are some reasons you might have a legal duty to register in a state:

  • You have an office or other location
  • You have an employee, contractor, salesperson, or any human affiliated with your business
  • You have a warehouse, fulfilment centre or you store inventory
  • You have economic nexus

If you have a material amount of online sales to US customers, it is very likely your business will have registration obligations because of economic nexus – read more about this concept below or in our blog.  

What is economic nexus?

Economic nexus is the reason most “out-of-state” or remote sellers have to register in US states, even though they have no physical presence there.

Economic nexus is simply the technical term for when an online business makes enough sales into a particular state that it creates a sales tax obligation there and needs to register. 

Having economic nexus and registering means a seller is required to collect sales tax. The nexus calculation is based on a state-defined dollar amount of sales or volume of sales transactions in that state. Not all states have economic nexus thresholds yet, but the trend is for most of them to start passing laws to be able to take advantage of the tax income.

Read more about nexus in general below, or find more detailed articles in our blog. 

 

What happens when I register?

You will need to get compliant by registering for a sales tax permit wherever you have nexus. It is a legal obligation to register your business directly with the tax authorities in that state.

Once registered, you will need to:

  • Charge the correct sales tax at checkout on sales made via your online store and marketplaces to consumers in the state where you are registered
  • Calculate how much sales tax you collected in each taxing jurisdiction within a state depending on your product and your customer’s address
  • File returns and pay over the sales tax to every tax office. These tax returns are filed either monthly or quarterly and need to be accurate and submitted on time to avoid penalties. 

It is impossible to calculate sales tax and file the periodic returns in multiple states without using software.

What if I don’t register?

It is unlawful to sell to US states where you are deemed to have nexus but are not registered for sales tax. Registering in multiple US states is a scary thought, so many sellers simply ignore the law and keep selling anyway, hoping that the states won’t legally come after them.

This is a very risky approach with potentially disastrous effects for your business, including severe fines, penalties and having your online store shut down.

The US states are actively looking for businesses who sell online to their citizens non-compliantly, so it is imperative that you get ahead of them or risk losing all your revenue in that state. 

Don’t worry, registering and complying with the US sales tax regulations is not that difficult if you have a tax partner who understands how online businesses work and has the tech to automate the sales tax compliance process for you. 

 

All things nexus

Nexus is just the fancy Latin word that the US tax authorities use to mean that you have a tax obligation. ‘Having nexus’ in a state means that your business is legally obliged to register for tax and comply with the relevant laws. 

When it comes to online businesses who sell physical or digital products to US consumers, there are 2 types of nexus that can trigger a sales tax obligation: physical nexus and economic nexus

While physical nexus (or physical presence) should be self-explanatory, it is not always obvious was each state considers physical connection. Economic nexus is actually a bit more straight-forward since it is based on a certain dollar value or sales volume determined by the specific state – but there are also complexities regarding what kinds of products need to be included in this calculation. 

To determine if you have nexus (economic or physical), ask yourself these questions:

  1. Do I have a location, warehouse, or other physical presence in a state?
  2. Do I have an employee, contractor, salesperson, installer, or other person working for me in a state?
  3. Do I have products stored in a state, in either a warehouse or fulfilment centre?
  4. Do I have an affiliate program with affiliates in various states?
  5. Do I have over 200 transactions or $100,000 of revenue in any state? 

If you answered yes to any of these questions, it is vital to you dig deeper into the relevant state’s laws to determine whether you have nexus.

Verify if your products are taxable

In the U.S., most tangible personal property (“TPP”) is taxable. In other words, most physical items like clothes, jewellery, appliances etc. will be subject to sales tax. However, some items considered to be “necessities” may not be taxable in all states and could be exempt. 

It gets more complicated when your product isn’t physical – digital products like software, apps or online content that is paid for by the user could also be considered taxable – but this depends on each state’s interpretation. 

Product taxability is not always “all or nothing.”

For example, in New York, clothing priced under $110 is exempt from state sales tax, but if your product sells for $111+ it could be taxable. That is the state tax, but clothing may not be exempt from local sales tax. In Illinois, grocery items are taxable, but they are taxable at a reduced rate. In Idaho, an eBook that is downloadable is taxable, but if it’s only accessible online, it’s not. 

As you can see, product taxability is not simple. 

Here’s a list of common item types that may not be taxable in some states:

  • Grocery food
  • Clothing
  • Certain books (textbooks, religious books, etc.)
  • Prescription and non-prescription medicine
  • Supplements
  • Magazines and subscriptions
  • Live webinars

This is not a complete list, so keep in mind that some states may exempt other types of items. If the items you are selling are not taxable, then you are not required to collect sales tax on those items, but you might still need to register (especially if you sell other products that are taxable). 

What if I sell via an online marketplace?

If you sell online to the US on a marketplace like Amazon, Walmart or eBay, the sales tax laws are different. The good news is that most states have shifted the tax obligation onto what they call the “Marketplace Facilitator”, which means the likes of Amazon have to charge the sales tax on your behalf and you – as the underlying merchant – may not have to. 

Therefore, after you’ve determined that you have sales tax nexus in a state, you’ll also want to check to see if any of those states have passed marketplace facilitator laws.

Unfortunately, just because the marketplace is responsible for charging the tax, doesn’t necessarily mean that you aren’t obligated to register with the state. We know it is ridiculous, but many states will still expect you to file sales tax returns even though you aren’t the one responsible for charging or paying over the tax

If you sell on a marketplace and your own web shop, then you’re still liable for collecting tax on sales when selling via other channels (including brick-and-mortar stores or through your business website). It’s a good idea to keep up with evolving marketplace facilitator laws to know which platforms collect when and where.

Want to learn more about US sales tax? Check out our blog