US sales tax rules: a quick guide for European companies
13 February 2023
US sales tax rules are complex and very different from European ones. They can be confusing for foreign companies selling products and/or services in the United States or planning to do so.
European companies operating in the US should have a general understanding of the country’s sales tax rules, as they can lead to significant financial exposure. Here is what you need to know.
US sales tax is imposed at the state level
The US does not have a federal sales tax. Each individual state has its own sales tax rules and regulations. This means that if you are selling services and goods across the US, you may have to deal with 46 unique tax laws. 46 because the following five states do not impose sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Beware that sales tax rates differ from state to state, and state sales tax filing due dates are not all the same.
Most states with a sales tax have local rates
Indeed, in addition to the 46 different sales tax, the majority of states, including California, have over 100 different rates depending on the local jurisdiction.
The NEXUS* concept limits a state’s ability to impose its sales tax law
A NEXUS generally means a connection. In US tax law the term NEXUS describes a situation in which a business has a sufficient tie to a state, either “physical” or “economic”. Prior to 2018 and the Supreme Court’s Wayfair decision*, states were only using the “physical test” to determine NEXUS, which means that a company needed to have a physical presence (e.g., employees, offices, inventory, etc.) in a given state to have a NEXUS and be subject to that state’s sales tax rules. Since June 2018, a growing number of states are also adopting the “economic” NEXUS criteria to determine whether a business that makes remote (online) sales should charge and collect sales tax in their state. The “economic” NEXUS can be based on a volume of sale transactions, or the total revenue from sales to clients located in that state.
Online marketplaces must collect sales tax on behalf of sellers
Although the sales tax is generally charged and collected by the seller, states now require that companies engaged in the business of “online marketplaces” (such as Amazon, or eBay) collect sales tax on behalf of the actual seller.
US sales tax is not a value added tax (VAT)
US sales tax is only imposed once on the final consumer, while the value added tax that most European companies know is a transaction tax collected at every step of production.
Bilateral tax treaties do not apply to state sales tax
Federal tax treaties between the US and foreign countries, that can limit the US government’s ability to impose taxes on foreign companies, do not apply to state taxes. As a result, while a foreign entity may avoid the imposition of US federal income tax under a bilateral tax treaty, it could be subject to sales tax rules of individual US states.
How ZEDRA can help
For European companies looking to expand their business operations into the United States, it is important to have a general understanding of US sales tax rules, as they can lead to significant financial exposure. To gain additional advice about the sales tax landscape in the US, contact Raphaël De Roubin.
*In the June 2018 South Dakota vs. Wayfair Inc. case, the US Supreme Court decided that any company with at least 200 sales or $100,000 in sales in a given state, must collect sales tax in that state. As a result of this ruling, a growing number of states started to disregard the “physical presence” NEXUS standard for sales tax purposes, and instead considered the “economic” NEXUS criteria to determine whether a business that makes remote sales should collect and remit sales tax in their state.