International sales – newbie or seasoned pro?
US sales tax is complicated, there’s no point denying and certainly do not bury your head in the sand. Like many daunting tasks its just a case of understanding your obligations and putting process, or technology in place to help manage it.
With a little support, you will be in a much better position to do business in the States. So, what do you need to know?
What’s the difference between VAT and sales tax?
Sales tax is an indirect tax on goods and services collected by the seller from the customer at the point of purchase. Unlike VAT (which is applicable at every stage in the supply chain at which value is added) US sales tax is only levied on the final B2C sale.
Surprisingly, though, that doesn’t make it a simpler system. The nation has over 12,000 different tax jurisdictions, each one with the power to change its tax rates and rules. Boundaries often change annually (including tax holidays such as “back to school” sales) and there are in excess of (intimidatingly) 100,000 rules covering business taxation. With B2B sales, there is also a stringent requirement for managing exception certificates before sales are zero rated.
Know where you have Nexus
If you don’t have ‘nexus’ in a particular state, you’re not required to collect and pay sales tax to the authorities. Nexus is defined as a connection to, or business presence in a state or jurisdiction.
As you might have guessed, what constitutes nexus can vary from state to state. It could be anything from operating a store or office to simply storing products in warehouses located within the state’s borders (including 3rd party fulfilment centres like Amazon FBA). In some states, just attending meetings or tradeshows in the state is enough to trigger nexus!
Are your boots made for walking?
Understanding the classification of the products you will be dealing with is very important as specific items within taxable categories may be tax exempt. For example, in New York walking boots are taxable, but hiking boots are not.
What is taxable changes on a state-by-state basis, and rates can vary on such a miniscule geographical basis that even something like street position can have an impact – two adjacent properties on the same street buying the same things from the same online retailer can be charged different tax rates!
Get serious about auditing
Each state conducts audits of businesses operating within its borders - whether physically or online. Businesses are required to record sales covering each city, county and state in which they operate. Over the last few years states have been ramping up their efforts to assess the tax liabilities of online businesses.
The complexity of the US tax system makes it vital that you have the correct systems and records in place to make your operations and obligations transparent. Failing to do so - however unwittingly - could see you paying hefty fines or owing interest on top of outstanding taxes. The average audit costs $100,000, so you really can’t afford to be complacent about it.
Form an orderly line - regulate your US tax affairs
The best way to avoid messy tax affairs is to get them right from the very start. Understand the tax system, plan your finances and put systems in place for record-keeping so that you can operate with transparency and accountability.
Here are some simple steps to follow in order to keep on top of your US tax requirements:
- Keep up to date with the requirements in your nexus state
- Set-up (and follow!) a process for keeping records of your sales, transactions and expenses
- Make sure you understand what constitutes nexus; otherwise you may accidentally make changes that qualify you for sales tax without realising it
- Use geolocation to check which tax jurisdiction you fall into; it’s not done by ZIP codes, so you really will need the help of a satellite to know for sure
- Find out when you’re required to file your returns and make a schedule so you know what to do and when to do it
- Keep your exemption certificates safe and up-to-date, if applicable
- Look into the Streamlined Sales & Use Tax Agreement (SST) would benefit your business. It’s a simplified version of sales tax that could save you time and money
- Plan for tax holidays - some states have sales tax holidays that temporarily exempt certain items, such as back to school goods, adding yet another layer of complexity to an already confusing process
Preparation is key and any information you can gather will help you avoid the pitfalls of selling in the US. Register for our upcoming webinar (featuring Avalara, GFS and Currencies Direct) on selling to the US and get ahead of the game.