Sales tax is a pass-through tax that a merchant must collect this from customers and then pay this to the State Revenue Department or in some instances, a city or district department. Sales tax is payable in all but five States. These taxes vary from 0 to 16 per cent. Much like VAT, some goods and services are exempt but predictably this also varies between States. Most businesses offering “services” do not look to pay sales tax but where tangible goods or software are involved, you should expect to include sales tax as part of your pricing. You should contact the Revenue Department in any States you operate in or use a specialist advisor to understand what level of tax is applicable.
From companies we have spoken to, sales tax can be the most difficult to manage as there are so many variables. Where many companies operate in multiple States, it is crucial to understand whether your economic connection to a State will trigger sales tax. If this connection is deemed substantial enough, a business is said to have “nexus” in a given State.
Simple triggers which could typically create a nexus include:
Having a physical location in the State
Having resident employees in the State
Having employees who regularly solicit business in the State
More complex triggers which may create a nexus include:
Having affiliates which may contribute traffic or sales to your business
Having staff working from home in a State
Having a server farm in a State
Holding inventory in a State
Nexus can be enforced by State authorities and may involve a nexus questionnaire in order to scrutinize your judgement around whether nexus has been established. The rate at which sales tax must be charged is also linked to whether a given State is an At Destination State or At Origin State. Most States are taxed at destination.
If you are an ecommerce business looking to do business in the US, you are strongly advised to work out whether you have established click-through nexus or affiliate nexus.
For sales tax, liability is with the seller, so if you did not collect sufficient sales tax from your customers, you will still be expected to pay the full amount. As a result, this could result in a large cost to the business given the average sales tax rate of 10 per cent. You must also apply for a permit to collect sales tax ahead of collecting it. Failure to do so is deemed criminal fraud.