As a small business or a self-employed person, you are responsible for paying your taxes, VAT, and actually, it is essential to know that even if you aren’t in the US, you might be liable for sales tax.
What is a Sales Tax?
In the United States, there is a sales tax that is only charged once and is a consumption tax. It will be charged at the final purchase of the last product by the consumer.
It is important to know that US sales tax is not national policy, unlike VAT is in the EU, or even is GST Australia. It exists at a state or local level. The power is given to the state and local jurisdictions – which is why vat and tax rates vary.
What does that mean?
It means that there are thousands of taxing jurisdictions within the US. And there are multiple factors to determine if your business is liable or not. This is called a business that ‘has nexus.’ Nexus is simply a connection.
What is nexus?
If you have spent any time reading the US sales tax laws or looking for tax explanations, you’ll have seen the word nexus.
‘Nexus’ is the commercial connections in a state. Simply put – if your business has a nexus in a state, you are liable for taxes there. Which means you have a duty to register and start collecting.
With the rise of e-commerce and digital sales, the tradition “physical store presence” nexus has had to be rethought. There are now multiple modern definitions.
While there is no standard policies and definition of what constitutes ‘nexus,’ there are specific characteristics that come into play. Understanding these factors will be what keeps you on the side of the law.
The physical factor would mean you have a store, storage, or a warehouse, an office, an employee, or something else tangible that represents your business in any state. You will most likely be liable for sales tax in that state.
Again the sales tax regulations will differ depending on what you sell. Is it a physical product? Perhaps a digital service? Or a physical service? It may also be a digital subscription or a digital item. There is specific guidance for digital products and SaaS.
Some markets and selling practices will also constitute a nexus in some states. You will need to be very clear about how you sell your products in order to be tax compliant.
If you are a small business, you will be happy to know that there is a threshold. You will need to sell above 200 transactions or $100,000 in the previous calendar year. If you remain under that threshold, then you do not have what is referred to as economic nexus. Just because you don’t have nexus doesn’t mean you don’t have to adhere to other tax laws within the state.
Once you know you have nexus, then you need to act on it asap. It isn’t something you can ignore. Here are some steps for you to make sure that you are managing your sales tax effectively.
Federal Tax ID
The chances are you will already have one of these, but if you don’t and you are running a business in the US, you will need an EIN. This is to enable the Internal Revenue Service to track your business activities. Like paying your income tax, for example.
a) You can apply online for your EIN right now.
b) As an international applicant, you can get the information you need on the IRS website
As soon as you have registered, you are going to have to comply with all of the parts of tax law. You can register on the individual tax agency website. Most of the applications are easy to use and come in multiple languages.
The exact locations of your customers will dictate which local taxes you need to apply to.
To do this:
Collect two pieces of non-conflicting evidence that prove where your customers live
Keep records of this evidence, just in case you get audited in the future.
Apply the tax to your sales: You will collect the tax at the time of the payment, so many sure you add it to the final transactions.
If you are taking steps to be sales tax compliant, and they aren’t filing, then you’re going to be in a whole heap of trouble. There are dates that you will need to file by. The filing doesn’t need to be complicated when you use the right sales tax filing software.
I’m Not A US Business – This Doesn’t Apply To Me.
Well, actually, it does. In 2018, the Supreme Court made a ruling in favor of the state government. The Wayfair sales tax case was a big deal and changed how businesses now view their responsibilities when it comes to US sales tax. All state agencies are also taking steps to tighten up their own policies and procedures. One of which will be remote sellers who aren’t complying with the local laws.
Once you have registered with the correct bodies, it is essential that you keep a detailed record of all of your sales and the locations in which you trade. Ensuring you are charging the correct taxes that are required by the state, and you would do well to keep both paper and digital copies of records too.