In US, sales tax is a consumption tax that is theoretically charged only once at the final purchase of the final product by the end consumer. US sales tax exists at two levels- at the state and local levels where the states and local jurisdictions have the power to set their own sales tax laws and rates.
- 45 states and the District of Columbia collect statewide sales taxes (where Alaska, Delaware, Montana, New Hampshire, Oregon do not have any sales tax at all!)
- 38 states impose some form of local sales tax, collected in part or all of the state
This results in the thousands of taxing jurisdictions in the United States. Several factors determine the sales tax nexus of the business.
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Contents
What is nexus?
A “nexus” means connection. A sales tax nexus refers to the commercial connection in a country i.e. the level of connection between a taxing jurisdiction and the business entity. If your business has nexus in a state, it means that you’re liable for taxes there.
Earlier nexus only referred to the physical presence, as in a storefront or a warehouse but now there are multiple definitions including digital and remote commerce, too.
Factors for sales tax nexus
Location
If a business has a physical presence in a state such as a retail space, storage space/warehouse, an office or an employee then it is required to register for sales tax there.
Product type
Sales tax policies are different for different products- physical good/ physical service/ digital service/digital item/digital subscription
Selling practices
In some states, certain marketing and selling practices constitute a nexus. Are you selling from a brick-and-mortar/your website/online marketplace? Do you use telemarketers to make calls to customers in a state? Are you having any affiliate businesses marketing your product in that state?
Sales
US tax laws include a tax registration threshold so that the small businesses are not overtaxed (or cripple under sales tax compliance). If the annual sales remain under the threshold amount, the business will not have economic nexus and need not worry about sales tax. If the sales surpass the threshold amount, then you need to look for the details of the sales tax compliance in your state.
The Streamlined Sales Tax Agreement
Streamlined Sales Tax Governing Board is an organization aiming to simplify and standardize the sales tax system across the United States. The Streamlined Sales and Use Tax Agreement (SSUTA) have been introduced which is a comprehensive, simplified tax policy that any state government can adopt. Many states have already adopted these.
23 full Streamlined member states: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, Wyoming
1 associate member state: Tennessee
The above states have similar tax definitions and policies. Each state sets its own tax return intervals and filing deadlines. You can register for all of these states at once and file simplified electronic returns via SSUTA.
US Sales Tax exemptions
If your sales are eligible for tax exemption, apply for a tax exemption certificate in each state where you’re registered.
5 Steps for US Sales Tax Compliance
- Get a Federal Tax ID i.e. Employer Identification Number (EIN), if necessary. The Internal Revenue Service tracks your business’ tax activities, such as paying business income tax through the id.
- Sales tax registration in that state.
- Determine the exact locations of your customers to determine which local taxes you need to apply if any.
- Each transaction in that state will be applicable to sales tax.
- Send proper tax invoices immediately after each sale in order to receive prompt payment from the buyer.
- File sales tax returns on time.
Can a non-US business ignore US Sales Tax?
No. Non-US business can’t ignore US Sales tax laws after the Supreme Court’s decision in Wayfair sales tax case ruling in favor of state governments. In 2018 in the South Dakota vs. Wayfair case, the Court deleted the physical presence rule within the Commerce Clause as the standard for creating nexus in a jurisdiction. The physical presence creates nexus and is still the first consideration in determining nexus. The state agencies have tightened their tax policies and cracked down on remote sellers who aren’t complying with local law.
As a sales tax calculator use cloud-based accounting software that automates the entire process. The records will be kept safely online even if the computer crashes.
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