Market entry playbook: Launching your brand in the U.S. tax landscape

In a 2015 Harvard Business Review article, entrepreneurship was labelled as “America’s ‘secret sauce,’” a key driver of the nation’s economic strength. The U.S. is renowned as an entrepreneurial haven, attracting businesses globally. But the U.S. sales tax system can be overwhelming for many. This article is a guide for businesses worldwide trying to navigate the complexities of the U.S. tax landscape, making it an indispensable market-entry playbook.

Starting a business in the U.S. requires a clear understanding of upcoming tax considerations. The U.S. tax landscape is complex, with various regulations, compliance demands, and tax rates. This complexity extends beyond states to different jurisdictions, posing challenges, especially for ecommerce businesses with diverse operations. 

The U.S. has over 13,000 sales and use tax jurisdictions, meaning established as well as new businesses face differing state and local tax rates, taxability, and exemptions. Each state has distinct rules covering state income taxes, sales taxes, and local levies. Dealing with this complexity demands a nuanced approach as compliance violations could potentially impact business operations. 

For businesses involved in product or service sales, understanding sales tax is crucial. It is also important to note that different tax compliance rules apply to physical and digital goods and services. The U.S. does not offer a one-size-fits-all solution for transaction-based tax, with rates and rules varying significantly between states Ecommerce ventures operating across states find this challenge magnified. Automation proves to be invaluable in efficiently managing diverse state-specific tax regulations for businesses trying to handle the complicated tax terrain.

Before entering the U.S. market, businesses should prioritise sales tax registration to meet diverse state and local tax requirements. Each state establishes its economic nexus threshold, indicating when a business becomes responsible for collecting and remitting sales tax. 

Understanding these thresholds and promptly registering for sales tax in relevant states is very important. By staying proactive and keeping track of changing regulations, businesses can ensure compliance with sales tax registration obligations, facilitating a seamless entry into the U.S. market.

Establishing a connection, or nexus, between a business and a taxing jurisdiction is vital for U.S. sales tax compliance. This triggers the obligation to collect and remit sales tax. Businesses must assess their activities — such as physical presence, economic ties, or use of third-party fulfilment centres — to determine nexus in a specific jurisdiction. 

In the dynamic ecommerce landscape, understanding and managing nexus are essential for a successful market entry strategy. By staying informed and strategically steering nexus considerations, businesses can position themselves for compliant and prosperous operations in the U.S. market.

Challenges like cash shortages can be tough for a startup and businesses looking to overcome such challenges need innovative solutions. Startup ventures can significantly improve financial sustainability by discovering lesser-known tax credits. Here is a list of five important, lesser-known tax credits: 

• R&D Federal Tax Credit: Startups can get up to $250,000 off payroll costs yearly for making new products, testing, and scientific work.

• Small Business Health Care Tax Credit: This tax credit covers up to 50% of health care premiums, supporting employee well-being. Businesses simply need to meet criteria like having fewer than 25 full-time equivalent employees.

• Startup Tax Credit for Retirement Plans: Eligible businesses can get up to $5,000 each year for three years when starting a retirement plan – thereby helping with financial planning for employees.

• Work Opportunity Tax Credit: This credit gives startups up to $9,600 per eligible employee, including military veterans and SNAP recipients.

For business owners simplifying tax and compliance functions, using automation with Avalara not only helps track these credits but also ensures easy adaptation to changing tax laws, rates, and holidays.

Selecting a business structure involves managing distinct tax implications based on the type of business. Whether you’re considering a partnership, exploring the flexibility of a limited liability company (LLC), or pursuing the tax advantages of a corporation, understanding the tax implications of a business is pivotal. Let’s understand how your choice of structure can strategically traverse the intricate landscape of taxes and regulations.

Sole proprietorship:

• For individual business owners reporting business income directly on personal federal income tax returns
• Business income is taxed at the owner’s individual federal income tax rate

Partnership:

• Business income flows through to partners’ individual tax returns via Schedule K-1
• Flexibility in income allocation based on partnership agreements

Limited liability partnership (LLP):

• Partners’ legal liability is generally limited to their investment in the business
• LLP income passes through to partners’ individual tax returns

Limited liability company (LLC):

• Offers legal and tax benefits with flexibility
• Single-member LLC is treated as a disregarded entity; multi-member LLC is treated as a partnership for federal income tax purposes

Corporation:

• C Corporation pays entity-level tax on income; employees and shareholders pay individual income tax on wages and dividends
• S Corporation may offer tax advantages with strict ownership restrictions; individual income tax on allocated corporate income

Nonprofit:

• Exempt from federal income taxes for qualified purposes like charitable missions
• Potential tax obligations on unrelated business taxable income from income-generating projects

To maintain financial stability, businesses must precisely calculate sales tax, demanding precision and compliance. Employing advanced tools that can seamlessly automate sales tax calculations in such cases is a game changer. Businesses can leverage cutting-edge technology to guarantee the accurate determination of their sales tax obligations across diverse jurisdictions. This action will not only save time but also minimise the risk of miscalculations that could otherwise result in financial discrepancies. 

Embracing a dependable solution for automating sales tax calculations becomes a strategic manoeuvre, assisting businesses in navigating the complexities of tax obligations and contributing to the overall efficiency and success of their operations.

Starting a business in the U.S. involves more than just choosing a business structure and complying with sales tax regulations. Non-U.S. businesses venturing into the U.S. market face unique challenges beyond sales and use tax, which require careful consideration for successful market entry. Let’s briefly understand these challenges: 

• Foreign bank reporting requirements: To combat tax evasion, the IRS mandates foreign banks to report on U.S. citizens’ accounts. Some foreign banks may opt not to engage with U.S. citizens due to the reporting burden, impacting expat entrepreneurs conducting business abroad.

• Expat-specific tax challenges: Expatriate business owners may encounter hurdles in finding accountants well versed in their unique tax situations. Selecting a tax professional with extensive expat experience becomes crucial to navigating international tax complexities and compliance.

Avalara offers a comprehensive solution, ensuring the precise calculation of sales tax, keeping businesses well informed about ever-evolving tax laws, and minimising the risk of costly errors in tax filings. This proactive approach not only streamlines compliance but also reduces the potential for business interruptions. With Avalara, businesses can confidently navigate the intricate layers of the U.S. tax landscape and stay ahead in an environment of constant regulatory changes.