Indirect tax - United States

Sales tax (and a corresponding use tax) is the primary indirect tax in the United States. Sales tax is a tax on consumer expenditures and is collected on sale transactions. Most jurisdictions in the US require that the seller collects sales tax on the sale of taxable goods or services and remit the tax to the appropriate jurisdiction’s tax authority.  This requirement generally extends to foreign sellers who meet the applicable state filing requirements as treaty protections do not typically extend to state and local level taxes.

Sales tax is only imposed on retail transactions. That is, tax is only due on the purchase of a taxable good or service when the purchase is made by the end-user of that good or service. When a taxable good or service is purchased by a customer that will resell the good or service, the purchase is generally not subject to sales tax. In such cases, it is generally the seller’s responsibility to collect from the purchaser documentation attesting that the purchaser is buying the goods or services in order to resell the goods or services.

It is possible for a vendor to not charge sales tax at the point of sale initially because the vendor does not have enough presence, whether physical or economic, within the state to require the collection and remittance of the sales tax. To compensate for this possibility, jurisdictions impose a use tax that is complementary to the sales tax. The use tax is a tax on the use or consumption of goods in a jurisdiction, regardless of where the goods were purchased. The use tax is generally imposed on the purchaser of goods or services, not the seller. Purchases of goods or services where sales tax was paid to the vendor on the invoice are exempt from the jurisdiction’s use tax. Additionally, use tax is generally not due to the extent that the purchaser properly paid sales tax to a different jurisdiction on the transaction and that jurisdiction also had the right to tax the transaction (the use tax paid must be equal to or greater than the sales or use tax that would otherwise be due).  It is noted that most states do not allow an exclusion from the use tax for VAT paid on an invoice to a seller.

For sellers with a physical presence in a taxing jurisdiction, there is no limitation on the requirement that a seller register for and collect sales tax (or a purchaser for use tax) based on the dollar amount of sales made. Many jurisdictions, however, provide exemptions for occasional and isolated sales. Under these exemptions, a seller typically is not required to register for or collect sales tax on sales that it only makes a certain number of times in a given period. For example, an individual selling his or her personal possessions or a company liquidating its assets may not be required to collect sales tax, depending on the law of the jurisdiction in which the sale takes place. These exemptions are not available in every jurisdiction.

However, as discussed below, out-of-state sellers with no physical presence in a state will generally not have to register unless their sales reach the state’s economic nexus threshold. Thresholds vary by state, but the lowest are generally around $100,000 of annual sales.  

Where a company is located or established has little or no bearing on whether the company is required to register for and collect sales tax. Instead, a seller is required to register for sales tax in a jurisdiction to the extent that the seller has ‘nexus’ with the jurisdiction. That is, the company must have contacts with the jurisdiction that are substantial enough to allow the jurisdiction to impose collection responsibilities on the seller. Although these requirements vary from jurisdiction to jurisdiction, the general rule is that almost any amount of physical contact with a state is sufficient to establish nexus with the jurisdiction. A company that has property or personnel in a jurisdiction, or that sends an employee, independent contractor, or agent into a state on behalf of the company for a temporary period or visit, likely has physical contact sufficient to establish sales tax nexus. Physical presence also includes personnel of affiliated entities conducting business activities in a state on behalf of the company. Additionally, every jurisdiction that imposes a sales tax has enacted some form of economic nexus provisions that establish sales tax nexus if certain revenue and/or transaction level thresholds are met. Therefore, nexus, like almost all aspects of sales and use tax compliance, must be examined on a jurisdiction-by-jurisdiction basis.

Many jurisdictions impose sales and use tax on the purchase of digital goods and services, electronically downloaded software, software as a service, and similar electronically supplied offerings. Whether supplies of such offerings are subject to sales tax in a given jurisdiction depends on whether the jurisdiction imposes tax on such goods or services. The tax can be imposed on the seller or the consumer, depending on whether the seller has nexus. A seller’s obligation to collect depends on whether the seller has established nexus with the jurisdiction.

The concept of businesses being ‘established’ and ‘non- established’ does not exist in the US for sales and use tax purposes. Instead, the critical consideration is whether a business has established ‘nexus’ with a particular jurisdiction, which would require that business to register and collect sales tax. Unlike the concept of being established, nexus does not depend primarily on a business’s primary location, but on whether a business has substantial contacts with a jurisdiction. If there are no minimum contacts with a jurisdiction (as defined above), then a business does not need to register.

Establishment principles aside, businesses typically do not need to appoint a third-party fiscal representative to register for sales and use tax in most jurisdictions. In some instances, a company may decide to appoint a representative, such as a certified public accountant or an attorney to assist with the registration process because registration requirements and procedures can be complex. Additionally, doing business in some jurisdictions may require registration with other agencies, such as the Secretary of State. These additional registrations may require that the company list a registered agent, which is often a third party.

The frequency with which returns must be filed varies by jurisdiction. For most jurisdictions, sales and use tax returns must be filed on a monthly basis. Some jurisdictions, however, allow for less frequent filings for taxpayers whose sales are under a set threshold. Other jurisdictions require reconciliation filings that must be submitted in addition to the periodic sales and use tax return filings. The filing periods for these reconciliation filings varies by jurisdiction.

Penalties and interest and typically imposed for both late filings of returns and late payments of tax. Penalties for failure to file or pay can be as high as 50% of the tax due for the period. Many jurisdictions also impose penalties for substantial underpayments or for non-payments that are the result of fraud or willful neglect. In some instances, the waiver of some penalties may be secured.

Sales and use tax compliance has fairly strict documentation requirements in virtually all jurisdictions. As a baseline, jurisdictions generally require that businesses maintain a complete record of all transactions for several years, usually five years at a minimum. Records generally include invoices, bills of lading, gross receipts from sales, and other pertinent records.

In addition, taxpayers must retain all exemption documentation to substantiate its exempt sales. This may include resale certificates, as discussed above. Additionally, taxpayers are generally required to collect exemption certificates in states that provide product level sales tax exemptions, which may include purchases of qualifying manufacturing equipment or software used in multiple states. Further, a taxpayer is generally required to collect an exemption certificate in states that provide customer level sales tax exemptions, which may include purchases made by non-profit organizations and direct pay permit holders. For example, if a business makes a tax-free sale to a wholesaler, the business must collect a resale certificate from the wholesaler, and the business must retain the certificate. Otherwise, the business may be held liable for the tax due on the transaction.

Moreover, all states with a sales tax have marketplace facilitator laws, which require marketplace facilitators – online platforms that enable third parties to sell goods through the marketplace website – to collect any tax due on sales made through the marketplace. The third-party sellers generally are not responsible for collecting tax on sales they make through marketplace facilitators, although they may still have an obligation to collect tax on sales made through their own website.  

In some instances, a jurisdiction may require some taxpayers to make advance estimated payments of sales and use tax prior to the date the taxpayers are required to file their returns and remit their tax payments. Late payment penalty can apply to both the tax payment and the estimated penalty. Additionally, jurisdictions often impose penalty for late payments or non- payments that are the result of fraud or willful neglect. In these instances, the various penalties may stack.

It is noted that sales taxes are trust taxes, and there are severe implications in instances where a taxpayer has collected and not remitted sales tax in a timely manner. Specifically, criminal proceedings may be brought, and individual liability can attach to responsible company employees.

A non-resident generally can’t reclaim sales tax that was properly levied.

A business need not be registered with any particular state or jurisdiction to incur sales and use tax obligations. To the extent that a company has established nexus with a jurisdiction for sales and use tax purposes, that company may be subject to the jurisdiction’s taxing authority. Although nexus standards vary slightly by jurisdiction, nexus is generally established to the extent that a company has presence, whether physical or economic, in a particular jurisdiction. Physical presence may be an office, warehouse, owned or leased personal property, or the presence of personnel, including independent contractors or agents that travel into the state to act on behalf of the company. Physical presence also includes personnel of affiliated entities conducting business activities in a state on behalf of the company. Additionally, every jurisdiction that imposes a sales tax has enacted some form of economic nexus provisions that establish sales tax nexus if certain revenue and/or transaction level thresholds are met.  

Taxing authorities in the Unites States generally do not have specific sales tax invoices, but certain information should be on invoices that are issued to comport with recordkeeping requirements. Depending on the requirements of the various jurisdictions, invoices may need to show: the billing and shipping address of the purchaser, the address of the seller, the amount of the transaction, a description of the goods and/ or services provided, the transaction date, any tax charged separately stated, and other pertinent information. Additional information may be required in order to utilize certain exemptions.