By Amy Chamoun, CPA, MST, Managing Director
Foreign companies that have activity within the U.S. ‒ whether in the form of physical presence or economic presence ‒ should closely review implications of the U.S. sales tax system. Foreign companies are often surprised to find out that specific activities thought non-taxable in the U.S. may, and do, trigger various types of taxes at the federal and state levels. In some situations, a foreign company may not have a federal tax obligation but may have significant state tax obligations. It’s important to note that every state, city and local government in the U.S. has different sets of rules making state tax planning complex and challenging from a compliance and administrative perspective.
Multi-Level Taxing Authorities
The U.S. has a multi-layered tax system which varies based on the way a foreign seller enters the U.S. marketplace. Selling and distributing goods or services directly into the U.S. from a foreign country, or establishing a U.S. subsidiary to sell and distribute goods or services, can create income and non-income tax obligations at the federal, state, city, and local levels, which includes sales tax obligations when specific nexus-creating activities are met. Additional state compliance requirements may follow if sales cross state lines.
Limited Protection: Federal Public Law 86-272
Federal Public Law 86-272 provides protection from state income tax if instate activities consist only of order solicitations involving tangible personal property; however, this protection is not extended to non-income related taxes, nor sales taxes. Direct sales made from a foreign country into the U.S. usually receive treaty protection only for income tax if no permanent establishment is created. State non-income-based taxes and sales taxes still apply as these are not afforded protection under 86-272 or tax treaties.
The following information is geared toward providing sales tax guidance for “remote” sellers that do not have a U.S. subsidiary or a permanent establishment. A “remote” seller includes any activity conducted through direct and indirect e-commerce, wholesale, distribution and fulfillment centers.
In the U.S., sales tax is a tax paid for by the consumer of goods and services which is administered by the varying states. A U.S. or foreign e-commerce remote type seller has the responsibility of collecting and remitting sales tax collected for all remote taxable sales provided such company has nexus in a specific state. Nexus or taxable presence standards for physical and economic presence vary by state.
Prior to June 2018, sales tax obligations only applied to sellers with a physical presence created generally by having employees or property in a state. The decision reached in South Dakota v. Wayfair in June of 2018 added complications for remote sellers doing business in the U.S. by abandoning the physical presence requirement and enabling states to charge sales tax to out-of-state sellers based on economic presence. Foreign companies can now be subjected to U.S. state sales taxes based on varying economic presence thresholds.
The majority of states quickly enacted economic nexus thresholds for total revenues and/or number of transactions rules in a state to determine whether a remote seller has a legal obligation to register, collect and remit sales taxes. See Exhibit A for economic nexus thresholds by state. Total revenue threshold generally includes both retail and wholesale sales and are sourced to the destination state. These standards extend to foreign e-commerce companies selling into the U.S. market.
Once a state’s economic nexus thresholds are met, the remote seller is required to register, collect, and remit sales taxes on all taxable sales, even if you have sales of goods and services that are exempted from sales tax, you may still have a filing obligation.
Tax is only required on taxable retail sales made to the consumer of goods or services, the end user. Sales of goods made to businesses at wholesale that will be resold to consumers are not subject to sales tax if a resale certificate is collected from the purchaser by the seller. Resale certificates are issued by each state where the transaction takes place. The purchaser, or in this case the wholesaler, is generally required to be registered with the state to obtain a resale certificate that can be provided to the seller. If a resale certificate cannot be provided by the purchaser/wholesaler, the sales are deemed taxable even if made at wholesale, and the seller must collect and remit sales taxes to the state tax authorities.
Economic nexus standards also apply to remote sellers (e-commerce companies) using fulfillment warehousing centers, such as Amazon among many others. Most states have shifted the sales tax collection and remittance obligations to the marketplace facilitators such as Amazon through their e-commerce platforms. This means that Amazon works with sellers to collect and remit sales taxes on behalf of the seller, of course at an additional cost to the seller.
It’s important to note that these marketplace facilitators assist with many state sales tax obligations; however, there are many states they do not cover. In these situations, it is the seller’s responsibility to ensure compliance in those states although Amazon, for example, is facilitating. If the seller is also making sales on their own without the assistance of the marketplace facilitator into the same states assisted by the facilitator, the e-commerce remote seller continues to have sales tax obligations for these transactions.
States continue to require the remote seller to comply directly by registering, collecting and remitting the sales tax on their own. Sales tax rates vary by state and local jurisdictions. The delivery address dictates the exact state and local sales tax rate that apply to a taxable sale. Collected tax gets remitted by the seller to the state and local jurisdiction by filing a sales tax return. Filing frequency varies by state but tend to be on a monthly, quarterly or annual basis.
The more you learn about the U.S. tax system, the more complex your questions may become. U.S. tax structure is like no other with its states and local jurisdictions adding to its complexity. A solid understanding will allow for proper planning and execution for remote sellers.
Sales tax surrounding e-commerce business can be tricky and very complex at best, but you don’t have to figure it out all on your own. We highly recommend that foreign companies looking to sell goods and services into the U.S. marketplace consult with a specialized state and local tax (SALT) professional. This will go a long way to minimize stress in complex tax areas, and to give you peace of mind that you are in compliance with each state’s tax law requirements.
PKF Advisory can assist you at every step of the way by helping you develop a well-thought-out plan and ensuring your e-commerce accounting processes and tools keep you in compliance with current legislation. For more information, contact your PKF Advisory client service team or:
Amy Chamoun, CPA, MST