For international companies that sell products to U.S. customers, American sales and use tax laws can be complicated. International vendors may believe that they are exempt from these taxes when they are not, or they may think the U.S. tax model resembles the VAT. These companies can find themselves liable for uncollected taxes, penalties and fines if they do not understand when and where sales tax is applied.
Here is a look at some of the most important information about U.S. sales tax for international sellers, especially ecommerce vendors.
1. Understanding Tax Treaties, Permanent Establishment and Nexus
The first thing international sellers need to know is that while they believe that national tax treaties apply universally and are therefore not subject to sales or use tax, the fact is that these treaties are not always recognized by U.S. States. According to SalesTaxSupport, sellers will be subject to state, use and local taxes, if nexus rules apply. Therefore international sellers need to understand American nexus rules for any states they are operating in rather than the guidelines of permanent establishment, which are the go-to rules for determining fixed place of business for VAT in the European Union. There are times when a permanent establishment is not created but nexus rules do apply, thereby making the company liable for sales and use tax.
In fact, each state has its own regulations about what creates a nexus and international sellers need to keep this in mind when considering whether or not to collect sales tax. Learn more about what creates a nexus in sales tax collection.
2. Registration Requirements
An international seller is not required to form or incorporate in the U.S. in order to register with the various states, but may register through their foreign entity. However, in order to register, almost every state requires the registering entity to have a Federal Employer Identification Number (EIN) (via SalesTaxSupport). Abroad, "to register" may strictly mean to incorporate, but international sellers should know that in the U.S., this registration means to create a business entity. Further, companies need to register in a state to apply for a sales and/or use tax permit. That registration must take place in each state they operate or have a nexus in since uniform sales tax certificates do not cover all states.
3. Fulfillment By Amazon Creating Nexus
International sellers also need to understand that using Fulfillment by Amazon (FBA) can also create a nexus. With more and more Amazon distribution centers being built all over the United States, this is a critical issue to keep an eye on.
4. Toll Manufacturers And Nexus
SalesTaxSupport defines toll manufacturing as the practice of when a manufacturer "processes raw materials for semi-finished goods" for a fee. For example, an American company uses a toll manufacturer to create or complete a product and the finished product is shipped to the U.S. This could create nexus for that toll manufacturer, making them subject to that state’s sales and use tax requirements.
5. Sales Tax Collection
It’s important that international sellers know that sales tax is a tax paid by the consumer for his purchases, and amount of that tax is defined by each state in the U.S. Unlike the VAT, this tax is only collected once. Whether or not a customer is charged sales tax, the seller is responsible for reporting and can be liable for collections, fines and penalties if tax is not collected properly. International sellers must understand when a nexus is created in each state, what qualifies as taxable property or services in that state, and destination vs. origin based sales tax collection as well. They should also keep in mind sales tax holidays and when sales tax exemptions for services apply.
6. Reporting And Filing A Tax Return
The next step international sellers will have to understand is how and when to their tax returns. They will need to report all the sales and use tax that they have collected and follow the state’s procedure and deadlines for filing, or they may incur late fees and penalties. However, many states offer discounts for filing on time or early and this can help an international seller who is new to selling in the States. Most states prefer companies to file online but there may be other options possible as well. Refer to each state’s guidelines to discover their filing deadlines and processes.
7. Danger: Changing Tax Codes
With a major U.S. election looming later this year, states scrambling to find additional budget and Congressional squabbles over Internet taxes, many of the laws regarding state and local sales tax collection have been subject to change. We’ve discussed the future possibilities on this blog about the Marketplace Fairness Act, the possibility of an Internet tax, and where the presidential candidates stand on changing the U.S. tax system. International sellers would do well to keep an eye on these issues, particularly over the next year. However, the safest steps that such sellers can take right now is to determine where they have a nexus in states that do collect sales and local taxes, and if so, make sure they are compliant with the rules and regulations for that state.