Avalara TaxQuest Question: Do I need to collect sales tax for online sales to the U.S.?
A foreign business owner selling handmade goods online and shipping directly to customers in the U.S. will face an important question while dealing with tax obligations. Should they be collecting sales tax on these transactions and how can they navigate the complexities of U.S. tax regulations? In this inaugural edition of Avalara TaxQuest, we answer this fundamental question and guide you through the intricacies of U.S. sales and use tax regulations.
The globalisation of ecommerce has made the world a smaller place. Customers can easily shop from across borders and have goods delivered to their doorstep thanks to the rapid increase of ecommerce businesses. While shopping has become easier for customers, businesses are dealing with immensely complex tax requirements. If your business is planning to sell goods into the U.S., here are some crucial considerations to guide you through the maze of U.S. sales and use tax obligations.
Establishing nexus
The concept of nexus serves as the foundation for determining a business’s tax obligations. Nexus refers to a sufficient connection or presence in a U.S. state that obligates a business to collect and remit sales tax on transactions conducted within that state. The U.S. Supreme Court’s 2018 South Dakota v. Wayfair ruling is the basis for how nexus is currently established.
Triggers for nexus
Before the ruling, a business had to be physically present in a state to require tax obligations. Today, even online sales into a state can trigger nexus — but that’s not the only way. Nexus can be triggered by various factors, and understanding these triggers is essential for keeping up with tax compliance. Here are some common scenarios that may establish nexus:
Physical presence: Traditionally, having a physical presence in a state, such as a bricks-and-mortar store, warehouse, office, or even employees, was a clear nexus trigger. However, with the rise of ecommerce, the definition of physical presence has evolved to include less tangible elements like inventory stored in third-party warehouses or affiliate relationships.
Economic nexus: In response to the global increase of online sales, many states have implemented economic nexus laws. These laws establish a nexus based on the volume or value of sales made into the state, regardless of physical presence. Thresholds for economic nexus vary by state but typically range from a certain amount of sales or a certain number of transactions.
Click-through nexus: Some U.S. states have enacted click-through nexus laws. This refers to when a remote seller enters into agreements with in-state residents who refer customers to that seller’s website in exchange for a commission or other considerations.
How to deal with nexus obligations
Once nexus is established, the next step is to fulfil the corresponding tax obligations. Here’s how your business can easily manage nexus obligations:
Assessment and monitoring: Regularly assess business activities and sales channels to determine where nexus may be triggered. Stay informed about changes in state tax laws and regulations that may affect your nexus status.
Registration: If nexus is established in a state, register for sales tax permits with the respective state’s tax authority. Each state has its own registration process, which may involve completing forms, providing documentation, and paying registration fees.
Compliance: Collect sales tax on taxable transactions within states where you’ve established nexus. We recommend that your business maintains accurate records of sales, tax collected, and tax remitted to ensure compliance with state regulations.
Tech-based solutions: Consider leveraging automated tax calculation and compliance software, like Avalara, to streamline the process of collecting and remitting sales tax across multiple jurisdictions. These solutions can help mitigate the administrative burden and reduce the risk of errors.
Navigating U.S. sales and use tax obligations as a foreign online business demands careful attention to detail and proactive compliance efforts. By understanding the nuances of nexus, sales tax collection, licence registration, tax compliance, and cross-border expansion, you can navigate this intricate landscape with confidence and ensure success in the U.S. market.
Empower your tax journey in the U.S.! Stay tuned for the next edition of Avalara TaxQuest, where we’ll explore the intricacies of sales tax collection and registration procedures in the U.S.
