1. US Sales Tax at a glance
As its name suggests, sales tax is a tax placed on the sale or lease of goods and services in the USA.
As a seller, if you are eligible to collect sales tax, you are required to add the amount of sales tax that applies to the sale or lease of your goods or services to the initial amount of that specific sale when you invoice a client in the USA. This process is called “collecting sales tax”. Your client will then pay you the purchase price of your products or services and the corresponding sales tax.
Once you have collected sales tax from all your clients, you pay the corresponding amount to the US tax administration on a monthly or quarterly basis.
In order to plan and manage sales tax for your business, you must answer 3 sets of questions:
- Eligibility: Are you eligible to collect sales tax? If so, do you have to collect sales tax for all your clients? In all states?
- Rates: What sales tax rates do apply to your products or services in each state? Are there additional taxes at county or city levels?
- Exemptions: As a vendor, are you exempt from collecting sales tax from your clients (exemptions may apply in some states or to some products or services that you sell)? As a client, are you exempt from paying sales tax to your vendors?
2. Are you eligible to collect sales tax?
Sales tax rates, transfer of property, and eligibility: 3 essential notions you need to understand
3. Your business model and states’ rules: the keys to master sales tax calculation
Let’s now have a closer look at the notion of eligibility: for the same business model, you may indeed be eligible or exempt depending on states’ rules.
Sales tax rules may impact some business decisions you make as you scale (e.g. logistics, HR, etc.), so it is important that you conduct a diligent analysis of your operations.
Condition 1: you sell tangible goods or services in the USA.
This condition is quite straight-forward when you sell tangible goods but regarding services, there is a gray zone for Software As A Service (SaaS) and other technological solutions. As digital technology becomes more complex, states are trying to figure out how to collect sales tax on goods and services that are currently slipping under the tax administration’s radar for they are not yet considered as “tangible”. Some states will most likely pass regulations in 2018 on SaaS.
Condition 2: you sell your products or services to an end-user.
Exceptions exist. For instance, some states will exempt companies that sell industrial products (e.g. production machines) that are used to manufacture food and beverages. You need to check each state’s rules for your specific goods and services.
Regarding the notion of end-user versus reseller, all states exempt goods made for resale in the same form, but some states will tax goods sold to resellers if resellers slightly modify these goods before they are resold.
Condition 3: you have a permanent establishment in the state where the transfer of property occurs.
What is a permanent establishment? The most obvious is, of course, a store. If you don’t have a store, other common premises defined as a “permanent establishment” are, for instance, an inventory, offices that you rent, your employees’ workspaces (if different from your offices, e.g. home), or fixed assets (e.g. equipment, vehicles, or machinery).
There are “permanent establishments” that are less obvious: for instance, if your products require set-up or maintenance that will be delivered by a service provider other than your company, the tax administration may consider that you have a permanent establishment at the place where such services are rendered.
Each state, again, has its own rule. For instance, let’s say that your company is located in Louisiana and that you have a client in Texas: if your salesperson visits your client in Texas for a business meeting, for signing a contract or for assisting in setting up your products or services, the tax administration will most likely consider that you have a permanent establishment in Texas! In California, if you have a sales agent who exclusively sells your products in that state, he or she will be considered as a permanent establishment.
In the case of SaaS, you can understand that the exact place where the transfer of property occurs is a matter of concern for the US tax administration…
4. How do you calculate and manage sales tax rates?
Sales tax rates can change every year. You need to keep an eye on rates in order to stay compliant with the US tax administration.
Sales tax rates calculation per US state:
Once you have determined whether you need to collect sales tax or not, you need to calculate rates that apply to your products or services.
As explained above, each state has its own sales tax rate. The total sales tax rate is the sum of the state’s sales tax rate plus the county’s sales tax rate (some cities also have their own sales tax).
You can find tools to calculate rates for each state at this link.
Accounting software integration:
As you scale and start selling in multiple states, we strongly recommend that you integrate sales tax parameters with your accounting software. It will help you ease communications with clients (a mistake on sales tax may become cumbersome to manage and tarnish your brand’s image), facilitate tax returns and audits, as well as manage changes in rates each year.
5. What do you need to do if you or your client is exempt?
You company may run into 1 of these 3 situations:
- You are exempt from collecting sales tax in some states: you then need to ask a Sales Tax Exemption Certificate for these states.
- Your vendor charges you sales tax despite your being a reseller: unless some specific rules apply, you do not have to pay sales tax. In that case, you must ask for a Sales Tax Exemption or Resale Certificate for the corresponding states and send it, duly completed, to your vendor. Be careful, deadlines may apply (e.g. for NY state).
- You charge sales tax to your client who appears to be a reseller and the latter disputes payment: you must ask the reseller a Resale Certificate in order to be allowed to cancel the sales tax applied to the issued invoice.
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Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances.