Thinking about expanding your business in the US may seem enticing but you must be ready to understand the daunting US Sales Tax system before that.
Navigating your way through the sales tax system is an essential step to accessing the vast potential of the US market. As a foreign entity, there could be many pitfalls and daunting compliances. Not having the proper US sales tax system knowledge will only work in your competitor’s favor.
So let the experts handle the complex, and break down the basics for you in easy-to-understand terms.
Why must you understand the US Sales Tax?
Sales tax is a consumption-based tax levied on the sales of goods and certain services in the United States. However, the US doesn’t follow the VAT(value-added tax) systems like other countries do. Rather US sales tax is imposed on a state-level basis which means the rates can significantly vary from one state to another. Thus, for foreign businesses in the US, it can become an intricate and challenging matter to comprehend.
The X-Factor of US Sales Tax: Nexus and Economic Nexus
While handling your tax from US business, there is one word you will definitely get to hear and that is Nexus. Nexus can be understood as a significant connection or presence in a state which defines the sales tax for a business.
Nexus was used to be applied when businesses have a physical presence in a state. For example, having a warehouse or store would invite taxes from the state. However, after the 2018 case of “South Dakota v. Wayfair”, the US Supreme Court ordered to consider economic activity in Nexus too.
Economic Nexus implies that having certain sales in a state can also trigger sales tax collection even without the physical presence. It considers a threshold amount of sales or a specific number of transactions. Therefore, one has to closely monitor their sales and business in different states while having state-specific guidelines.
How to get a Sales Tax Permit?
After getting the Nexus established, the next step is to get a US Sales Tax Permit. Foreign Business Owners must request a sales tax permit for each state where they have a presence. For this, you will be asked to submit an application to the State’s Tax Authority. Provide them with the essential business information, and then designate a person to handle your sales tax matters.
Figuring out what gets Taxed?
As if understanding the nexus wasn’t enough, the US Sales Tax System is complicated when it comes to understanding the taxable items too. Different states have different considerations for taxable items. In order to ensure that you are not getting tax charged unnecessarily, you must familiarize yourself with the state-wise rules.
In some US states, it is applied on almost every item; whereas, in other states, there are tax exempted goods and services. These tax exemptions may include items like groceries, medications, prescriptions, etc. Being mindful of these can help you to report accurate taxes.
Next Step: Tax Collection and Remittance
It isn’t a rocket-science now, is it?
Once you have established Nexus and done your homework on taxable items, all you need to do is collect the sales taxes. To maintain compliance, you must charge the accurate amount of taxes from the customers. Being a Foreign Business in the US or being unaware of the right amount will not work as an excuse with the authorities.
Along with the collection, you must be well-versed in the sales-tax remittance frequency as well as the method per the state. On one hand, where some states follow monthly tax remittance rules, other states follow quarterly or annual tax remittance. To avoid penalties or additional interests on the tax amount, it is suggested to mark the important dates on your calendar and never miss them.
Keep the Exemption Certificates ready
While doing business in the US, it is possible to encounter tax-exempt customers as well. They may be resellers, non-profit organizations, or government entities. In order to avoid charging tax from these customers, you must collect valid exemption certificates. Keep these certificates as safe records to be used in the future.
Stay one step ahead: Leverage Technology
Being a Foreign Business in the US that is new to the system, you can turn to sales tax software for an advantage. Utilization of technology can become one of your best decisions ever.
Be it tax calculations, collection, or reporting, you can automate it all. See it as an investment that can save hours of your time while reducing the risk of errors as well.
We know it was a load of information to process in a go. So, here is a sneak-peak. To successfully be on the top of the US Sales Tax system as a Foreign Business, you must do the following:
- Keep a close eye on Nexus/Economic Nexus
- Get your Sales Tax Permit
- Collect and Remit accurate amounts of tax
- Utilize Sales Tax software as your sidekick
When looked at with a confused sight, these steps might seem exhausting. But once understood, these can help you to rock the US market with your business passion. However, if it still feels like you need assistance, you can always seek an expert to have your back.
If you are looking to file Federal Tax, know which one fits your business needs; Form 941 or Form 944.
Written by – Priyanka Rampal
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