US Sales Tax

With complex and varying compliance rules across 45 States, US Sales Tax can present a significant and burdensome barrier to successful trade in the US. This challenge is heightened by the increasing scrutiny that is being given to reporting by the state tax authorities looking for additional revenues.

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45 independent tax regimes

US Sales Tax is a consumption tax on the sale of goods and services to the end consumer. Unlike VAT or GST, it is only levied on the final transaction with the customer, and there is no charging or reporting requirements for the companies in the supply chain. In most situations, the seller is held responsible for the calculation, collection and settlement of tax to the local state.

It is charged by State and local authorities and administered by the merchant who is responsible for charging a combined % tax.  A merchant must charge sales tax if it has a ‘nexus’ in the State, which can be a physical presence of employees, property or inventory.  This is similar to the permanent establishment concept.

Sales Tax was first introduced in West Virginia in 1921. It has since spread to 45 states in the US. The US is one of the very few countries in the world that still applies a final sales tax; most OECD countries now operate a full VAT or GST tax regime.

Complex US sales tax compliance

Each state sets operates its own compliance regime, which creates complex variations in:

  • Which goods and services are liable to tax (e.g. food and clothing is often excluded)
  • Invoicing requirements (e.g. legal basis of tax)
  • Registration requirements with each state authority
  • Reporting timetables and deadlines
  • Sales tax returns
  • Fines and penalties for non-compliance
  • Tax audit processes

Such differences mean it is important to plan the best structuring of invoices and in which state the tax should be recognised. Careful planning at the outset is vital to ensure any queries from the tax authorities are kept to a minimum.

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