Navigating US Sales Tax: A Guide for EU Firms

Businesses from Europe doing business in the US must have a basic understanding of the US sales tax system, including when and where it applies. Without this, businesses run the risk of unanticipated tax exposure, fines, and compliance problems. Here is what you should know.

States in the US apply sales taxes

There is no federal sales tax in the United States. Rather, state-specific sales tax laws and regulations are established. Because of this, you might have to deal with up to 46 different state tax systems if you sell goods and services throughout the United States. 46, not 51, since there is no sales tax in five states: Alaska, Delaware, Montana, New Hampshire, and Oregon. Remember that state-by-state variations in sales tax rates and reporting deadlines can introduce further complications.

Local rates apply in most states where sales taxes are imposed

There are 46 distinct sales tax regimes, and most states lack a consistent rate. Instead, the locality of the taxable transaction determines the sales tax rate. California, for instance, has hundreds of distinct rates.

A state’s authority to enforce its sales tax law is restricted by the NEXUS concept

In general, a NEXUS indicates a link. According to tax experts, NEXUS refers to a circumstance in which a company has a strong enough “physical” or “economic” connection to a state to generate a tax liability. Having a real office, keeping an inventory, or hiring just one person in a state might all result in “physical” NEXUS.

The majority of states have also adopted the “economic” NEXUS criteria to evaluate whether a business that conducts remote transactions must collect and pay sales tax in their state, even if they do not have a physical presence, following the Supreme Court’s 2018 ruling in South Dakota vs. Wayfair Inc. The amount of sales transactions and/or total revenue from clients in that state are usually used to determine the “economic” NEXUS. Significantly, each state has a different “economic” criterion.

Online marketplaces are required to collect sales tax for vendors

Most states now mandate that businesses that function as online marketplaces, like Amazon or eBay, collect sales tax on behalf of the actual seller, even if the seller is typically the one who charges and collects it.

Sales tax in the US is not considered a value-added tax (VAT)

As most European businesses are aware, the value-added tax, or VAT, is a transaction tax collected at each stage of manufacturing and distribution, whereas the sales tax in the US is levied only once on the final customer.

State sales tax is exempt from bilateral tax treaties

State taxes are exempt from federal tax treaties with other nations, which may restrict the federal government’s authority to impose taxes on international corporations. As a result, a foreign corporation may still be governed by state sales tax laws even if it is free from US federal income tax under a bilateral tax treaty.

If you have any questions, please do not hesitate to contact us.