A Quick Guide to US Sales Tax
Expanding your business across borders can be an exciting opportunity, especially when it comes to tapping into the vast consumer market of the United States. However, for foreign businesses venturing into the US market, it’s essential to understand and comply with the complex system of sales tax regulations. Navigating the intricacies of US sales tax can seem daunting at first, but with the right knowledge, you can ensure compliance and avoid potential pitfalls. Here’s our quick guide to US sales tax to get you started.
What is sales tax?
Sales tax is a consumption tax imposed on the sale of goods and services at the state and local levels in the United States. Unlike Value Added Tax (VAT) in Europe, US sales tax is typically not included in the displayed price and is added at the point of sale. The tax rates and regulations vary across different states, cities, and counties, making it a complex landscape to navigate.
State sales tax
Each state in the US has the authority to set its own sales tax rates and regulations. State sales tax rates range from zero to nearly 8%, depending on the state. For example, Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a state sales tax. However, in states like California, Indiana, and Rhode Island, state sales tax rates currently exceed 7%.
Local sales tax
In addition to state sales tax, many local jurisdictions, such as counties, cities, and districts, may impose their own sales tax. These local sales taxes are added to the state sales tax, resulting in the total sales tax rate for a particular area. It’s essential to be aware of both state and local tax rates to accurately calculate the sales tax owed, as combined they can reach nearly 10%.
The term ‘economic nexus’ refers to the connection a business has with a particular state that requires it to collect and remit sales tax. If a business has a physical presence, such as a brick-and-mortar store, office, or warehouse, in a state, it’s generally required to collect sales tax from customers in that state. However, in recent years, due to the growth of ecommerce, economic nexus rules have become more complex, and businesses may have economic nexus in a state even without a physical presence.
Sales tax and online sales
Because of this rise in ecommerce, online sales tax has become much more relevant for businesses. In 2018, the US Supreme Court ruling in South Dakota v. Wayfair expanded the ability of states to collect sales tax from online retailers, even if they don’t have a physical presence in that state. As a result, many states have implemented economic nexus laws, requiring online sellers to collect and remit sales tax if they meet certain thresholds in terms of sales volume or number of transactions.
Registering for sales tax
To comply with US sales tax requirements, foreign businesses need to register for sales tax permits in each state where they have economic nexus. This involves submitting an application, providing necessary business information, and obtaining a unique tax registration number. It’s crucial to research and understand the US sales tax registration process and the specific requirements of each state, as they can vary.
Determining taxable goods and services
In the US, the taxability of items can vary from state to state. While some states have a broad range of taxable items, others may exempt certain goods or services from sales tax, such as groceries, prescription medications, or medical devices. It’s essential to consult each state's Department of Revenue or seek the advice of a tax professional to determine if your specific products or services are liable for US sales tax.
US sales tax collection and filing
Businesses are responsible for collecting sales tax from customers at the point of sale and remitting it to the appropriate tax authorities. Depending on the state, sales tax returns may need to be filed monthly, quarterly, or annually. It’s important for businesses to maintain accurate records of sales and track US sales tax collected to simplify the reporting process. Late or incorrect filings can result in penalties and interest charges, so it’s vital to stay organized and meet the filing deadlines. For this reason, it’s recommended to use automated sales tax software to ensure your data and calculations are accurate.
Expanding your business into the United States can be a rewarding venture, but it requires a solid understanding of US sales tax regulations. By grasping the fundamental concepts, such as economic nexus, taxability rules, registration, and filing requirements, ecommerce businesses can navigate the challenging landscape of US sales tax compliance.
To find out more about how automated sales tax software can help your ecommerce business succeed in the US, head over to our services, head over to the LumaTax website.
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