JANUARY 17,2020. 4 MINUTE READ
How to navigate American Sales Tax as an e-commerce entrepreneur
How to navigate American Sales Tax as an e-commerce entrepreneur
In today’s day and age, e-commerce platforms like Amazon FDA are making it increasingly easy for e-commerce businesses to expand internationally. However, like anything, that comes with its own challenges. Figuring out how each country’s VAT and Sales Tax rules work and how to navigate them is no easy task to accomplish. To help you along this journey, we’ve put together a comprehensive guide on American Sales Tax aimed at e-commerce businesses based in the UK.
Growing your business’s reach into the international market is now easier than ever before, regardless of what platform your business is operating on – either your own website or through a third party marketplace. Before you dismiss the notion, expanding internationally comes with a tonne of benefits. Most important of which is the fact that you would be greatly expanding your customer base in the least costly way possible. However, it is extremely important that you maintain your grip on international tax liabilities when doing so. In this article, we will be explaining exactly how you can do so.
What is American Sales Tax?
American Sales is very similar to VAT, i.e. it is a small percentage tax you have to pay on the retail price. However, unlike VAT, Sales Tax can differ from state to state since each one is free to set their own rates and thresholds. Hence, instead of calculating the sales tax for America as a whole, you have to monitor your sales in each state separately to know when and how much American Sales tax you are liable to pay for your e-commerce store.
What is an American Sales Tax Nexus?
US legislation states that if you have a Nexus in any of the 50 states there, you are liable to pay Sales Tax. Previously, a Nexus used to mean having a fixed asset or physical address in the USA. However, since South Dakota v. Wayfair in 2018, a Nexus now also means having a tangible presence. If you have a high enough number of sales in a State, you are liable to pay the American Sales Tax Nexus.
Ways you could have a Sales Tax Nexus?
As with all Sales Tax in USA, these also vary in each State. However, generally speaking, here are a few possible ways you could have a Sales Tax Nexus:
- You hold a physical address there, i.e. you own an office or physical store
- You have an employee or contractor operating there
- You have inventory stored there
- You have an affiliate based there
- You have a drop shipper based there
- You have either completed more than the limit for transactions or exceed the sales amount for that State
Varying Nexus Thresholds
As mentioned before, each state can set its own Sales Tax regulations and thresholds. If you aren’t using a system like Xero, this can get very confusing to keep up with and manage.
Sales Tax thresholds are usually set at a specific amount or number of transactions. You will be liable to pay whenever you exceed the lower limit of any of the two.
This can vary from no Sales Tax at all, such as in New Hampshire, to thresholds of $100,000. As of 2020, 45 States collect Sales Tax.
Product Selection
Since taxes are not applicable to all products in USA, it’s important to know which products are taxable in each State before you start selling there. Physical goods are usually taxable in every State but even that has variations. For example, clothing is zero-rated in Pennsylvania and groceries are reduced rated in Illinois.
Sales Tax Rates
Individual rates of American Sales Tax for e-commerce transactions also vary in each State. The table below shows the State Sales Tax rates as well as the average combined city and country rates.
Taking a look at this, it’s clear that rates can differ quite a lot, going anywhere from 4-7% on State Sales Tax and then varying even more once you take city and country rates into account.
What to do if you are liable?
Whether you think you are liable or just can’t figure out if you are due to the State to State differences in regulations, talk to us at Touchstone and let us help you figure it out. Once we have that figured out, we can move on to contacting the State department to apply for and acquire a Tax Permit.
It is essential to have a valid Sales Tax Permit since it is an offence to charge Sales Tax without one.
Once you have one, you will also be issues dates for filing. These can, as with all other things, vary State to State so make sure to stay on top of them so you don’t get penalised for late filing.
Calculating your American Sales Tax
Once you have acquired your permit for a specific State, you will need to charge Sales Tax on all your sales there. You will be liable to pay the State Sales Tax in addition to the district and/or city rate. Touchstone can easily assist you with this with the help of our accounting partner, Xero. With Xero and similar accounting systems, we can help you stay on top of any and all Sales Tax you are liable for and ensure that there is no miscalculation possible.
In case you haven’t made any sales in a particular State for a specific tax period, you will still have to submit a zero return before the filing deadline otherwise you will be penalised by the State.
What to do if you are liable?
Whether you think you are liable or just can’t figure out if you are due to the State to State differences in regulations, talk to us at Touchstone and let us help you figure it out. Once we have that figured out, we can move on to contacting the State department to apply for and acquire a Tax Permit.
It is essential to have a valid Sales Tax Permit since it is an offence to charge Sales Tax without one.
Once you have one, you will also be issues dates for filing. These can, as with all other things, vary State to State so make sure to stay on top of them so you don’t get penalised for late filing.
The Next Step
If all of these complications in American Sales Tax sound more difficult than you had initially thought, we at Touchstone would be happy to help you out. Although it may look daunting, the pros of expanding internationally greatly outnumber the cons. Touchstone can help you track liabilities in UK, EU, USA & Canada through our expert services and accounting partners like Xero and Link My Books. If you want to expand internationally, contact us today.