When talking to non-US based sellers, we often hear, “My country has a tax treaty with the United States. We don’t have to worry about US tax.”
This is true. For income tax. But sales tax is a whole other ball of wax. And international sellers are often caught unaware when they realize that they should have been collecting sales tax from their US-based buyers and remitting it back to state taxing authorities.
Let’s dig into what non-US based sellers need to know about sales tax in the United States.
What is sales tax?
And why do international sellers need to understand it?
Sales tax is a tax on a transaction. The amount is a small percentage of a transaction, generally 4-8%. The tax is charged by the retailer at the point of sale and then periodically remitted to the state’s taxing authority.
Sales tax is similar to goods and services tax (GST) in Canada and Australia or to VAT in many other countries.
However, one main difference between sales tax and income tax (which is covered by international tax treaties) is that, in the US, sales tax is governed at the state level.
Each of the US states makes their own laws and administrative rules when it comes to sales tax. Now, these rules and laws have to be within reason and conform to the US Constitution, but they are in no way uniform. Everything from which retailers need to collect, to the tax rates to collect, to when to report and file sales tax varies from state to state. That means that retailers need to understand each state’s laws about whether or not they are required to collect sales tax on sales to buyers in that state.
Which retailers are required to collect sales tax?
Retailers, including e-commerce sellers, are required to collect sales tax from buyers in a state when they have sales tax nexus in that state.
Business activities that create sales tax nexus include:
- A location, such as an office, store, or warehouse
- An employee or contractor
- Inventory in a warehouse
- Doing temporary business such as at a tradeshow or craft fair
- Economic nexus – Making a certain amount or dollar value in sales in a state
Keep in mind that each state makes their own rules and laws when it comes to nexus, so what creates nexus in one state may not create nexus in another. You can read more about sales tax nexus here.
Economic Sales Tax Nexus
Economic nexus allows states to require that e-commerce retailers collect sales tax from buyers in the state even if they have no other tie to the state. This change was determined by the South Dakota v. Wayfair Supreme Court case in 2018. Before the Wayfair case, states could generally only require businesses with some sort of physical presence in the state to collect sales tax from buyers.
But Wayfair was the US states’ response to the increasing amount of sales taking place online. States use sales tax to pay for budget items like schools, roads, and hospitals. Because many online purchases were not taxed, states noticed their treasuries draining.
Now, every US state (barring the four that don’t have sales tax) has an economic nexus law. Just like with other sales tax laws, economic nexus laws vary by state.
However, in general if a business does more than $100,000 in sales to buyers in a state and/or more than 200 transactions to buyers in a state, they should determine if they need to become sales tax compliant in that state.
If economic nexus is affecting your business, Hands off Sales Tax (HOST) is here to help. We’ll do an economic nexus determination for your business and get you sales tax compliant to avoid penalties and interest down the line. Contact us.
I’m required to collect sales tax. Now what?
If you’ve determined that you have sales tax nexus in a US state and are required to collect sales tax from buyers in that state, the next step is to register for a sales tax license.
Each state’s sales tax registration process is slightly different, but in general you are required to provide identifying info such as your business name and address, business entity type, and business ID.
For non-US businesses, registering for a sales tax permit can be difficult. Some states require that you provide a US-based bank account number. Many online forms are not designed to accept international addresses. Because of this, we recommend working with a sales tax expert to get registered for a US sales tax permit. At HOST, we can guide you through all the hoops you need to jump through to get sales tax compliant.
How to Collect Sales Tax
Collecting the correct amount of sales tax can be one of the most complicated aspects for sellers, US-based or international, to wrap their brains around. The reason for that is that the US has more than 12,000 different taxing jurisdictions. States, the counties within those states, and the cities within those counties, can all levy their own sales tax. E-commerce sellers are, in most cases, required to collect the precise sales tax rate at the buyer’s ship-to address.
This means that if you make a sale to a buyer in Ballwin, St. Louis County, Missouri you’d be required to collect the sum total of the following:
- 4.23% Missouri (state) sales tax rate
- 2.26% St. Louis County (county) sales tax rate
- 1% Ballwin (city) sales tax rate
But if you made a sale to a buyer in unincorporated St. Louis county, then you’d only be required to collect the sum total of the 4.23% Missouri state and the 2.26% St. Louis County sales tax rate.
To further confuse matters, some states also have “regional” taxes that might encompass multiple cities or counties. And some items, like groceries or clothing, are not taxable in all states.
Fortunately, many e-commerce shopping carts like Shopify can now help e-commerce merchants collect the right amount of sales tax based on the customer’s location. However, you’re still required to code your SKUS to ensure that your shopping cart doesn’t automatically collect sales tax on non-taxable items (like groceries, clothing and other items in some states.)
Read more about collecting the right amount of sales tax in the US here.
Filing and Remitting Sales Tax
When to File Sales Tax
With sales tax, the more sales you make and the more sales tax you collect from buyers in a state, the more often you are required to file a sales tax return.
The most prolific high-volume sellers are required to file monthly or even more often than monthly. Mid-level sellers generally required to file quarterly, while low-volume or seasonal sellers are generally only required to file annually.
As a non-US seller it’s likely you’re required to collect US sales tax due to economic nexus. In this case, you’ll likely be required to file quarterly or annually.
How to File Sales Tax
Each state has an online portal where you can file sales tax. However, some states’ online portals are not set up to allow sellers without US-based bank accounts or addresses to file. In this case, it’s necessary to use a sales tax expert as a registered agent to file sales tax on your business’s behalf.
When it comes to filling out the actual sales tax forms, states’ processes vary widely. For the most part, you’re required to tell the state how much sales tax you collected at the state level, the county level, the city level and the special/regional tax level. This means that instead of telling the state you collected $5,000 in sales tax in total, you’re required to tell them you collected $5.00 from the city of Ballwin, $450 from the county of St. Louis, $221.45 from the county of Adair, etc. These sales tax forms can be quite long and complex.
Fortunately, software or a sales tax expert can help you avoid penalties and interest by filling out sales tax filing forms the way the state requires.
Non-US based sellers also sometimes have trouble remitting the sales tax due to the states. Again, the lack of US-based bank account can get in the way of sales tax compliance. That’s another reason a registered agent can be vital in helping you stay sales tax compliant in the United States.
Are you a non-US based seller with sales tax nexus in the US? Contact HOST for a sales tax compliance evaluation.