Expanding Overseas: A Guide to U.S. Sales and Use Tax

The e-commerce sector in the US has seen tremendous growth in recent years, rising from $1.04 trillion in 2022 to $1.119 trillion in 2023 (a 7.6% increase), according to Digital Commerce 360. Finding a niche in this growing economic sphere offers enticing opportunities for businesses around the world. Interestingly, many European companies are looking at market expansion as a strategy to increase their revenues, and the US market stands out as an ideal territory.

Exploring and delving into this vast commercial landscape promises enormous potential. However, understanding and effectively navigating the complex U.S. sales and use tax laws in each state is essential for a smooth and profitable journey.

Traditionally, sales tax in the United States is a tax imposed by a state on the purchase of goods and services where the seller has a physical presence in the state. The United States allows each state, county, city, and local government to set its own tax rate and regulations. Currently, 45 states impose sales tax. It is important to note that sales tax is typically imposed on retail sales, leases, rentals of most goods, and some services.

Individual tax jurisdictions may choose to exclude certain goods or services from tax or apply a reduced rate to certain items. As digital services grow, countries are working to define these technologies within their tax frameworks, leading to increased complexity in tax laws and regulations.

Many states do not have a precise definition of how or where sales tax applies to digital products or services. For cloud sales, such as software as a service, the situation becomes even more complex, as states take a wide range of approaches. One example of such approaches is for states to apply different sourcing rules to determine the taxability of digital products or services, depending on the location of the buyer, seller, or server hosting the digital product or service. Another approach that some states take is to tax some digital goods while others may be exempt or subject to a reduced tax rate.

A quasi-governmental body known as the Multistate Tax Commission is working to create a single act that could eventually be adopted by all 45 states and the District of Columbia. That single act would likely be debated and passed during the 2025 state legislative sessions.

Seller use tax is a form of tax imposed on sellers who do not have a physical presence in a state but sell products or services in the state and are registered to collect the tax. This tax is essentially the equivalent of a sales tax for out-of-state sales transactions.

“Nexus” refers to a significant business presence or connection in a state that triggers the collection and remittance of sales tax on transactions involving that state. Nexus may be determined by physical presence (e.g., a store or office) or by sales volume/number of transactions, through laws commonly known as “economic nexus” laws.

Economic nexus occurs when a company reaches a certain threshold of sales revenue or transaction volume in a given state (even without a physical presence). This nexus standard was established by the U.S. Supreme Court’s 2018 Wayfair decision.

This concept has become more important with the growth of e-commerce and online sales, as companies can have a significant economic impact in a state without having a physical presence there. For example, California imposes sales tax on retailers with sales of more than $500,000 their conditioneven without a physical presence. Understanding state nexus laws such as these can help businesses proactively manage their tax obligations.

It’s crucial for European businesses to understand the depth of sales and use taxes across the United States: at the state, county, city, and local levels. Understanding these nuances can mean the difference between a tax shortfall and an overage—a discrepancy that can lead to penalties or negatively impact profitability and customer satisfaction for your goods or services in a given market.

The U.S. sales and use tax reporting process and the level of information required varies by state. Here are some key things to consider.

The frequency of sales and use tax returns is set by each state’s tax authority. Some states require businesses to file monthly, while others may require quarterly or annual filings. The frequency may also depend on the amount of sales tax collected by the business. For example, businesses with higher sales tax revenues may need to file more frequently than those with lower revenues.

To avoid penalties and ensure compliance, it is essential that you understand the specific tax filing requirements for each jurisdiction where you have a tax liability.

When filing sales taxes, businesses must report sales and tax collected for each jurisdiction in which they have a tax liability. This includes reporting at the state, county, city, and local levels. The reports should include details such as total sales and the amount of tax collected for each jurisdiction in which you have a tax liability.

Some sales may be exempt from sales and use tax, but businesses must track and report exempt sales separately from taxable sales on their sales tax returns. Proper documentation, such as exemption certificates, is necessary to support claims of exempt sales. Typically, sales and use tax exemptions are allowed for sales to nonprofit entities or when the product is used in a manufacturing process or is sold during a sales tax holiday; for example, in the case of school supplies.

The US market offers lucrative opportunities for European businesses, but to unlock this potential and navigate the intricacies of the system, a clear understanding of US sales and use tax laws is essential. Understanding the intricacies of the nexus, complying with unique state, county, city and local sales and use tax laws at the district level, accurate recording and consistent reporting of tax collections are all part of the foundation for success.

By clearly understanding these responsibilities and creating solid processes around them, European businesses can effectively leverage the potential that the US e-commerce market offers.