Entering the US Market? Don’t Overlook Sales Tax
Published on by Cheryl Ganim in International Business, Tax Services
- U.S. sales tax obligations are determined state by state, not nationally.
- International businesses can have sales tax obligations without a U.S. office or permanent establishment.
- Economic nexus can trigger registration and collection requirements based on sales alone.
- Employees, inventory, contractors, and other physical presence can create additional obligations.
- Planning before entering the U.S. market can help businesses identify and manage sales tax exposure.
Sales tax issues international businesses should consider before, during, and after entering the U.S. market.
For international companies, the United States can be an attractive growth market, but it’s also one of the more complex indirect tax environments in the world.
Unlike many countries that administer VAT or GST nationally, U.S. sales tax is primarily imposed and administered at the state and local level. That means a company selling into the U.S. may need to evaluate tax obligations across dozens of jurisdictions, each with its own rules for nexus, taxability, exemptions, registration, filing frequency, and marketplace sales. Currently, 45 states levy a sales tax, and 38 states allow additional local sales taxes in hundreds of local jurisdictions.
Treaties and permanent establishment concepts
International businesses often ask whether an income tax treaty protects them from U.S. sales tax obligations. The answer is generally no. International companies do not necessarily need a U.S. office, U.S. subsidiary, or U.S. permanent establishment to have U.S. state sales tax obligations.
Remote sellers—including sellers located outside the United States—can be required to register, collect, remit, and file sales tax returns when they have sufficient connection, or “nexus,” with a state.
Treaty provisions, including permanent establishment rules, generally aren’t applicable for determining whether a foreign entity has taxable presence in a particular state. A company may have no U.S. federal income tax permanent establishment and still have state sales tax collection obligations because the legal standards are different.
US sales tax compliance basics
Most U.S. states impose sales tax on retail sales of tangible personal property, and many also tax certain services, digital products, software, electronically delivered goods, SaaS, admissions, rentals, and other transaction types. States also generally impose a complementary use tax on the use, storage, or consumption of taxable items purchased without sales tax.
A seller with sufficient nexus in a state is typically required to:
- register with the state tax authority
- collect applicable sales tax from customers on taxable sales
- remit tax collected to the state, and where applicable, local jurisdictions
- file periodic sales tax returns, even if no tax is due for a period, and
- maintain records, including invoices, exemption certificates, marketplace reports, and tax calculation support
Economic nexus and physical presence nexus
For international sellers, the practical impact is significant: a company located outside the United States can be required to collect U.S. state sales tax if it has sufficient sales into a state, even if it has no physical contact with that state. Because the U.S. system is state-based, there is no single national sales tax registration that solves the issue everywhere. A company must generally analyze its obligations state by state.
States that impose sales and use tax have enacted economic nexus rules for remote sellers (generally established at sales of $100,000). State laws vary significantly, including how thresholds are calculated, which sales count, whether exempt or resale sales are included, and whether marketplace sales count toward the seller’s threshold.
Physical presence principles remain relevant. Nexus-creating contacts can include having or maintaining property in a state, directly or through an agent, and performing solicitation, delivery, repair, or other activities in the state. Employees working from home can also create nexus and a sales tax filing requirement for a business in many states.
For international companies, this means that operational decisions such as where to store inventory, whether to use U.S. contractors, and whether to hire U.S. employees can change the company’s state sales tax profile.
Forming a US subsidiary
Some international groups form a US subsidiary for commercial, legal, banking, customer service, or tax reasons.
A US subsidiary may create or increase sales tax obligations through:
- US offices or employees
- sales representatives or customer support personnel
- warehousing and fulfillment activities
- intercompany sales or distribution arrangements
- state business registrations, and
- broader state income, franchise, gross receipts, payroll, and property tax considerations
The group should evaluate whether the foreign parent, the US subsidiary, or both are making sales, holding inventory, contracting with customers, or using marketplaces. If you have questions about your potential sales tax obligations, or are considering entering the US market, contact us for a free consultation with one of our top sales and use tax professionals. We’re here to help.
