The US sales tax (GST) tax is something that concerns us if we sell into the United States, even if we are selling through a company formed in the USA (i.e. Wyoming, Delaware) or through a foreign entity formed outside of the USA, or as foreign individuals located outside of the US, and regardless if the product ships from outside of the US to clients in the US, or if you use a third party for order fulfillment.
If you have Physical Nexus or Economic Nexus in a State, you might be required to collect sales tax and remit it to that State, or in each State where you have Physical or Economic Nexus.
Generally, for an e-commerce store, the Economic Nexus is the one we should be worried about.
Physical Nexus vs. Economic Nexus:
Physical Nexus: Traditionally, a business had to have a physical presence, such as a brick-and-mortar store, warehouse, or employees in a state, to be subject to that state's sales tax laws.
Economic Nexus: Economic nexus rules change the game. They consider a business's economic activity within a state, such as sales revenue, transaction volume, or a combination of factors, as the basis for determining whether the business is obligated to collect and remit sales tax in that state.
Triggers for Economic Nexus:
The specific thresholds for economic nexus vary from state to state. Common triggers include:
Sales Revenue Threshold: If a business exceeds a certain amount of sales revenue within a state, it may trigger economic nexus. The threshold amount varies by state and can range from a few thousand dollars to millions of dollars in annual sales.
Transaction Threshold: Some states consider the number of individual sales transactions as a trigger for economic nexus. Again, the threshold varies by state.
A Combination of Factors: Some states have a combination of sales revenue and transaction thresholds, meaning that a business may trigger economic nexus if it meets any of these criteria.
Registration and Compliance:
Once a business triggers economic nexus in a particular state, it is generally required to register for a sales tax permit in that state.
The business must then begin collecting sales tax from customers within that state on taxable sales, file regular sales tax returns, and remit the collected taxes to the state's taxing authority.
Application to foreign entities:
These rules will apply to your business regardless if you are selling from a US registered entity, or from an entity formed abroad which is not even registered in any US State as a “foreign entity”
Professional Services are not subject to US Sales Tax
The provision of professional or personal services (counseling, web design, etc) are generally not subject to US Sales Tax.
This does not only occur in the US.
This sale tax practice of requiring foreign entities to register, collect and remit Sales Tax is not unique to the US tax system. For example, if you form a Wyoming LLC and provide counseling services to a Client in Dubai (UAE), after you exceed a very low threshold, you will be required to register for sales tax in Dubai, collect and remit sales tax.
Where you sell your products influences the sale tax registry, collection and remittance.
Rules differ whether you sell through your own store, let’s say Shopify, Wix, etc., or whether you sell on a marketplace like Amazon, Etsy, Aliexpress, etc.
Selling through your own Online Store
Pros of selling Selling through your own store (not through a marketplace) is that you would only need to collect sales tax once you meet the Sales Revenue Threshold or Transactions Threshold. So for small businesses that do not meet the threshold, this can make the price to the End Customer more appealing as sales tax will not be applied to their purchase.
On the other hand, the cons is that once you meet the threshold in a State, you will be required to register for Sales Tax, and collect and remit the tax in every State where you have the Economic Nexus.
Even though platforms like Shopify have tools to help you calculate sales tax, you would still need to register, collect and remit sales tax as you would be the responsible party. Of course, there are companies that can take care of these tasks for you on your behalf
There are special sales tax laws for marketplaces.
When selling through a Marketplace facilitator, you don’t need to meet the Sales Revenue Threshold or Transactions Threshold for the Sale to be subject to Sales Tax, so from the first sale, the Marketplace would collect the sales taxes, and remit it to the State.
Pros of selling through a marketplace, from a sales tax perspective, are that you don’t need to register before the State, Collect Tax, and Remit it to the State, which simplifies your yearly compliance, but on the other hand, the con is that sales tax would be charged to the client from your first sale.
1- US Sales tax applies to both companies registered in the USA, or in a foreign jurisdiction, selling to customers in the USA.
2- US Sales Tax does not apply generally to professional or personal services.
3- Sales Tax is triggered in a US State by having Economic Nexus and/or Physical nexus on that State. The rules that trigger these nexus vary State by State.
4- Economic Nexus is the most common nexus triggered by online stores after meeting a threshold of transactions or monetary amount.
5- After triggering the nexus, the company must register for sales tax in each State where the nexus has been triggered.
6- If you sell through a marketplace, the Markeplace will collect sales tax on your behalf.
Disclaimer: The information provided herein is for informational purposes only and should not be construed as, relied upon as, or be a substitute for financial, tax, and/or legal advice. It is recommended to seek the guidance of a licensed attorney and/or advisor for personalized advice tailored to your specific situation. Information may be incomplete, incorrect, and/or not updated.
About the author:
Jean Franco Fernández Clark, Corporate & International Tax Lawyer. Speaks English, Spanish, French, Italian, Russian, Chinese Mandarin. Founder of Offshore Affairs.