US Sales tax – what do you need to know when exporting to the US?

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Anyone who has read Brad Stone’s fascinating The Everything Store will be familiar with this story – Amazon has decided to build their first HQ in Seattle, Washington in order to avoid paying high sales tax. Back in time, in order to pay sales tax in a given state, a retailer would need to have physical presence in this state. As a consequence,  ecommerce retailers established their businesses in states with low sales tax rates and low population, avoiding states such as California or Texas.

South Dakota v. Wayfair shakes things up

About everything has changed with the recent Supreme Court decision in South Dakota v. Wayfair. The court decided that “the physical presence rule for state tax jurisdiction is incorrect and not a requirement under the Commerce Clause of the U.S. Constitution.” Thus, in order to be eligible for paying the Sales Tax, the merchant does no longer need to have physical presence in a state – it’s enough if she has what’s called an economic nexus.

What’s an economic nexus?

The economic nexus means that a business has economic activities in a given state. Each state defines the nexus individually and the thresholds that make a business eligible for paying the sales tax vary from state to state.

Thus, an ecommerce business selling to buyers from California needs to make 200 transactions to California or exceed $ 100K of sales volume to this state in order to be eligible for the California sales tax of 7.25%.

The same business would need to exceed $ 500 K of sales volume to Texas in order to have to pay its 8.25% sales tax.

A very handy map showing all the thresholds per state can be found here.

What does it mean for non-US sellers?

Whereas the Supreme Court ruling does not explicitly mention businesses exporting to the US, there is no reason to believe that non-US sellers would be exempt from collecting and paying the Sales Tax if they have an economic nexus in a given state. The linked article from TaxJar cheerfully explains that the only way not to be eligible for the US Sales Tax is not to make any sales to the US. The other solution is to make so low volumes as to not be eligible for the Sales Tax. Any exporter who exceeds the per-state thresholds will need to face the reality of having to establish a tax presence in various US states and collect and pay the Sales Tax per state.

As a result, the ruling which was initially aimed against Amazon, ends up by hurting SMB’s for whom the need to figure out the new taxation rules may be daunting to say the least.

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