The following is an extract from the taxation section of the US passport which is kindly sponsored by Avalara
As an indirect tax (a tax levied on goods and services), sales tax requires the seller to collect funds from the consumer at the point of purchase.
Today, there are over 12,000 state, county and city jurisdictions in the US charging a sales tax. 45 states and the District of Columbia now impose a sales tax on retail sales and some services. The bulk of their revenue is generated from sales taxes, not income taxes. As an indication of the importance of sales tax to a state, in Texas sales tax accounted for 54.3% of all its revenue in 2013
Five states do not have a state-wide general sales tax – Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska and Montana do allow localities to charge local sales taxes
Value Added Tax (VAT) is applied every time value is added at each stage during the supply chain, whereas sales tax is collected only at the time of the final sale.
If a seller has nexus in a state they must collect sales tax on all taxable sales regardless of the channel.
Depending on the state in which a customer is based, different items may be taxed at different rates. In some states for example, food is not taxed, while in others the same item may be classified differently.
In New York, clothing and footwear costing less than $110 per item / pair is exempt from state sales tax, yet it is still subject to local sales tax in some jurisdictions. Local jurisdictions can change their tax policy towards clothing once a year.
Exemptions might include “most fabric, thread, yarn, buttons, snaps, hooks, zippers and similar items that become a physical component of clothing” or are used to repair it.
To be compliant, a retailer needs to know the correct classification of an item in each state to ensure it collects and remits the correct level of tax. Collecting too much in one state will make it uncompetitive, while not collecting enough increases its exposure to potential fines. Adding to the complexity, in some states the rates can vary by city, county, or even street. Two adjacent properties can have different tax rates.
In an effort to safeguard sales revenue, each state conducts audits of businesses, which may result in penalties and interest. Businesses must keep records of sales in each US city, county and state in which they sell.
International businesses selling in the US are not required to collect sales tax in a state unless they have ‘nexus.’ Nexus is defined as a connection or business presence in a state or jurisdiction. If a business has nexus in a state, they need to collect and remit sales tax according to the state regulations. Activities leading to having nexus vary per state and can include activities such as opening offices, stores or franchises, storing items in warehouses or even attending meetings or tradeshows.
Once you have determined where nexus exists for your business, you are required to calculate, collect, report and remit that state’s sales tax. For this reason, sales taxes are remitted based on where your business is actually located because it is the physical structure of the business that actually creates nexus. However, there are several other scenarios where nexus can be applied and these should also be considered.
An international business has a presence in multiple states. It could take the form of a store, or even a concession within a larger retail establishment. In this case, they will more than likely have sales tax obligations in each location.
Nexus can be created by employing sales people who work in the states. For example, if employees or contractors conduct any work for a customer in the US, this may have created nexus in that state.
Regularly attending tradeshows or advertising in the US can be considered nexus in certain states.
Additional factors that can create nexus obligations are:
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