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Taxation

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usa taxation information

The following is an extract from the taxation section of the US passport which is kindly sponsored by Avalara


Introduction

US Taxation is a crucial area for any business to understand. This section focuses on sales tax; highlighting some of the complexities involved in trading into the US – 50 states and over 12,000 jurisdictions.

 


What is Sales Tax?

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


Sales Tax differs from VAT

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.


Just How Complex is Sales Tax?

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.

 

USA Sales Tax Information


The Risk of Audit

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.


Nexus: Do I Have to Collect US Sales Tax?

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.


What Constitutes a ‘Significant Physical Presence’ (Nexus)?

Scenarios that could trigger Nexus and sales tax obligations:

 

Scenario #1

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.

 

Scenario #2

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.

 

Scenario #3

Regularly attending tradeshows or advertising in the US can be considered nexus in certain states.

 

Additional factors that can create nexus obligations are:

  • Property ownership: owning or leasing any real or personal property in the US
  • Product delivery: having company personnel deliver / install products in the US
  • Product storage: renting or owning storage, warehousing or drop-shipping facilities

Top 8 Areas to Consider in your Business Plan for Selling in the US

  1. Keep up-to-date with each state’s tax requirements
  2. Establish processes for recordkeeping
  3. Understand nexus requirements
  4. Plan to use geolocation over zip codes
  5. Set out a returns filing and remittance schedule
  6. Collect and store all exemption certificates
  7. Identify if the ‘Streamlined Sales & Use Tax Agreement’ is right for you?
  8. Plan for sales tax holidays

Further information

To access the Full Report, follow this link here to register and download.

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