The Basics of U.S. Sales Tax
U.S. Sales tax does not have to be cumbersome if addressed upfront, setup correctly, and managed appropriately. U.S. sales tax operates very different than a Value-Added Tax (VAT) System. Sales tax is only imposed upon the end user. As outlined below, there are 5 fundamental sales tax concepts to grasp.
While sales tax is the obligation of your customers to pay, it can become your tax exposure if you do not correctly collect and remit it. A primary goal in addressing sales tax is to ensure your customers’ obligation does not end up as an expense on your profit and loss (P&L).
Subject to a sales tax responsibility. There are two drivers when determining nexus.
o Physical Presence: Having a person or property located within a state on a continuous basis can create physical nexus.
o Economic Threshold: Having revenue and sales transactions above a certain level can create economic nexus.
Is your revenue is subject to tax? 45 states (and more localities) all have authority for their own sales tax laws and determine what is taxable. As a general rule, the sale of tangible products are subject to tax. Services may be subject to tax, and software varies typically by the deliver method (i.e. electronically delivered, hosted, SaaS). There also is a determination for if your customer is subject to tax based on the entity type (Government, Educational Institution, Not For Profit) or if their use of your item may be exempt (i.e. Manufacturing, R&D, Resale).
If you have nexus and established taxability, then a registration requirement may exist. Consideration should be given to:
o Secretary of State for the authority to transact business in a state.
o Sales tax registration to collect, remit and/or report your sales tax obligations.
o Other agencies for income tax, employment tax, unemployment tax, as well as business licenses.
Properly invoicing customers for sales tax is critical. With over 10,000 sales tax rates, this may seem overwhelming, but solutions are available to simplify the tax collection. Ensuring data is collected on where your customer is receiving and using the goods and/or services is a critical data element that will need to be captured.
How often you file a sales tax return is important. Many jurisdictions utilize a monthly, quarterly, or annual reporting requirement. Filing frequency is based on either your amount of sales or the sales tax you collect. Upon registration, the state will issue a sales tax license, which provides your filing frequency and the information needed to setup your online tax account for that jurisdiction.
Addressing these items as you prepare for sales in the U.S. is paramount to minimizing or eliminating your sales tax exposure. A holistic approach can address the above items together but also in conjunction with your sales process, internal accounting systems, and record keeping requirements. When approaching U.S. sales tax, ensure that you have the resources and team in place to conquer the complexities of compliance. With a dedicated sales tax team and the experience to guide you through these items specific to your business, BGBC is ready to assist. Contact us today!
Steven A. Eichenberger, CPA
Director, Launchpad USA
+358 45 140 4911