You’re a small, family-owned business that manufactures consumer goods. In the last couple of years, innovative new products you’ve created plus a global e-commerce boom have prompted you to start selling internationally. So far, you’ve dipped a toe into several international markets, using e-commerce marketplaces and it’s going well, particularly in the US, where sales are starting to boom – your 3PL has been sending orders out all over the country.
You haven’t paid sales tax in the US… and you know you’ll need to at some point. How do you work it out?
US sales tax is levied in almost all 50 states, but at different rates and under different rules. Your business could be liable for sales tax in the US, irrespective of where in the world you’re located. It doesn’t help that the US has one of the most complex tax systems in the world.
Sales tax in the US is levied at the state level and 45 states and the District of Columbia (Washington D.C.) have a sales tax. Five states Alaska, Delaware, Montana, New Hampshire and Oregon – do not have a sales tax. To complicate matters further, 38 states have some form of local tax, collected in part or all of the state.
When must e-commerce sellers collect tax?
Whether or not you have to collect sales tax in a particular jurisdiction depends on whether you have “sales tax nexus” in that location and also on what you sell. In this case we’re talking about physical retail products – the rules that apply to taxation of SaaS products, digital products and online courses are different.
What is “sales tax nexus”?
Sales tax nexus means that you have a ‘significant connection’ to a particular state or district and it applies regardless of whether you are based in the U.S. overseas. If you have a sales tax nexus in a U.S. state, then the state requires you to collect sales tax from customers in that state.
Certain activities are considered to create a nexus. These include:
- Economic nexus – Exceeding the online sales or transactions thresholds set by the state. These differ from state to state
- A location – an office, warehouse, fulfillment center, store, or other physical place of business
- Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
- Team – a person providing services for your business including an employee, contractor, salesperson, or installer
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
As an international e-commerce merchant, your first step is to work out whether your business has a sales tax nexus in each of the states you’re selling to.
If you think you may have sales tax nexus in a state, it’s a good idea to check with state’s the taxing authority to determine whether or not you do if you are required to pay sales tax in that state.
This awesome interactive map shows you taxes rates by state and lets you click through for comprehensive information.
What comes next?
If you establish that nexus exists, it’s time to get compliant. Your next step is to register for sales tax, and then collect and remit the taxes. You’ll typically be liable initially for sales tax in the state where your business is registered, unless it’s one of the states that do not levy sales tax. If your ‘home’ state charges sales tax, then you will probably have “nexus” in the state.
