Most e-commerce businesses will expand into international territories thanks to platforms such as Amazon FDA making it simple to do so. Each country’s VAT or Sales Tax rules must be adhered to, however, so here’s the lowdown on American Sales Tax for e-commerce stores operating from the UK.
Whether you have opted for a 3rd party marketplace to host your e-commerce store or are selling directly from a website, growing your business into international markets has never been easier. By opening the doors to international trade, you are greatly expanding your potential customer base with minimal additional cost. But it is essential that you stay on top of your international tax liabilities. In this article, we are looking at American Sales Tax, but you can read more about VAT in different countries, or more about VAT in general, in our VAT hub.
What is the American Sales Tax?
American Sales Tax is a small percentage tax paid on the retail price in a similar method to VAT. The major difference between VAT and Sales Tax is that every State is free to set their own thresholds and rates. This means you must monitor your sales to each State separately, rather than to America as a whole, to know if and when you are liable to pay American Sales Tax for e-commerce stores.
What is an American Sales Tax Nexus?
USA law says you are liable to pay Sales Tax if you have a Nexus in any one of the 50 states. A Nexus is a tangible presence. This used to mean a fixed asset or physical address but the definition has now been widened (Wayfair, 2018), meaning that if you make a high number of sales into a State you are also liable.
Possible ways to have a Sales Tax Nexus
These vary from State to State but as a rule, you have a Sales Tax Nexus if:
- You have a physical office or store there
- You have an employee or contractor there
- You store inventory there
- You have an affiliate there
- You have a drop shipper there
- You exceed the sales amount for the State or complete more than the stated number of transactions
As mentioned above, every US State can set its own Sales Tax threshold. This can quickly lead to complications if you aren’t keeping your books up to date through Xero or a similar system.
The thresholds are usually set as an amount and a transaction number; you will become liable whenever you pass the lower of these two figures.
These can vary from no Sales Tax at all e.g. New Hampshire to a threshold of $100,000. In 2020, 45 States collect Sales Tax and you can see the most recent threshold guidance here.
Not all products are taxable in every State. Before you start to sell your products in the USA check which States your products will be taxable in. Physical goods are usually taxable, but exceptions include groceries in Illinois (reduced rate) and clothing in Pennsylvania (zero-rated).
Sales Tax Rates
The rate of American Sales Tax for e-commerce transactions is also set individually by the State. The following table shows the State Sales Tax rates along with average combined city and county rates.
SOURCE: The Sales Tax Clearing House
As you can see, rates can vary quite dramatically with anything from 4-7% on State Sales Tax and vary further once city and county rates are applied.
What to do if you are liable
If you believe your e-commerce business is liable or are unsure due to the State by State complications, you will need to confirm this with your accountant. Once you have confirmation, either you or your accountant will need to contact the State Department and apply for a Sales Tax Permit.
Make sure you have a valid Sales Tax Permit before you begin charging Sales Tax as it is an offence to do so without one!
You will also be issued with dates for filing, which again can differ from State to State so make sure you add these to your calendar to avoid penalties for late filing.
How to calculate your American Sales Tax
Once you have applied for your permit, you will need to charge Sales Tax on all future sales to that State. This rate should be the State Sales Tax plus the district rate and/or city rate. We recommend you use Xero to help you keep track of your Sales Tax liability and run the final figures by your accountant to avoid miscalculation.
If you have not made any sales in a State for a tax period, you must still enter a zero return before the deadline. Failure to do so will result in penalties.
If American Sales Tax for e-commerce is more complicated than you’d hoped, we are happy to help. While it looks complicated, the benefits of selling internationally far outweigh the difficulties in tracking. We can help you track your liabilities in the US, Australia, and Europe through a combination of automation and Xero. If you are looking to expand internationally, get in touch today.
The best time to start is now.