Intro by USLawforNordics
U.S. sales tax is a complicated matter. We often meet Nordic entrepreneurs who think that only U.S. companies can be liable to pay sales tax. This is wrong. If you´re selling your services or products to U.S. customers, you will be subject to sales tax in the states to which you have established a close enough connection (“nexus”). Establishing nexus can be done by visiting customers in a particular state, or even just storing inventory in that state. The matter of sales tax becomes even more complex due to the fact that every state has its own rules. This blog post will make you aware of certain basic concepts of U.S. sales tax, which you should know about before selling your services or products to U.S. consumers.
Background
As a U.S. tax advisor that works with companies for Sweden, Norway and other parts of Europe, I know and understand that our U.S. sales tax rules can be complex and confusing for foreign (non-U.S.) companies that are engaged in or are interested in engaging in business in the United States.
While there are several reasons why our U.S. sales tax rules can be confusing to companies not familiar with our U.S. taxing structure, it is very important for foreign (non-U.S.) companies that are selling or plan to sell products or goods to U.S. consumers to have at least a general understanding of our U.S. sales tax structure and how our sales tax laws may impact them.
In this blog post, I have identified 4 key concepts that Swedish, Norwegian and other European companies should know U.S. sales tax.
- Sales Taxes Are a State Tax: Perhaps one of the main concepts to understand is that the United States does not have a Federal level sales tax. That is, our U.S. federal taxing agency, the Internal Revenue Service (IRS), does not administer or oversee any type of sales tax. Our sales taxes are administered by each individual state within our United States. You see, under our governmental system of federalism, our states are sovereign and independent governments with the authority to enact and administer their own laws and rules. While it may seem concerning that every state has its own set of laws and rules, it’s important to know that our states do have restrictions imposed on them by our U.S. Constitution and cannot freely impose their laws at random (I’ll cover this point more later in this post). Also, even though there are fifty states in our country, not all states impose a sales tax.
- Sales Tax is a Transaction-Based Tax: For many non-U.S. companies, our U.S. transaction-based sales tax is vastly different from the consumption based (VAT) model followed throughout Europe. One way in which a VAT compares to a sales tax is that a VAT is generally imposed at on all “business inputs” at every stage of production. For instance, a VAT may be charged when raw materials are sold to a manufacturer, again when the manufacturer sells his finished product to a distributor, again when the distributor sells the product to a retailer and once again, when the product is sold to the final consumer. However, in the U.S. none of these same business inputs would be subject to sales tax. That is, each sale can progress up the chain without the imposition of sales tax. In the U.S., sales tax is only imposed on the final consumer. While in practice, there are requirements that each party must comply with (making this a topic which is worthy of its own future post) – the main concept to understand is that our transaction-based sales tax system means that sales tax is generally only charged once and only to the final consumer of the product.
- Tax Treaties Do Not Apply for Sales Tax: Many non-U.S. companies – in particular those that are familiar with international tax concepts and U.S. federal tax treaty protection – are often surprised to discover that, in general, our S. states do not recognize tax treaties that have been entered into by our federal government (bi-lateral tax treaties). This is because our states are not a “party to” or “bound by” any bi-lateral tax treaty our federal government enters into. Therefore, a non-U.S. company may satisfy the applicable provisions of a bi-lateral tax treaty and avoid the imposition of U.S. federal income tax but the same non-U.S. company could very well find that it is subject to the laws of our individual states.As an example, let’s say a Swedish company decides to store its own product inventory in the U.S. in order to have its inventory ready for immediate shipment to its U.S. customers. Assuming the Swedish company has no other activity in the U.S. other than inventory in storage and U.S. customers – the U.S.-Sweden Tax Treaty would protect the Swedish company from federal income tax. This is because the Swedish company has avoided creating a Permanent Establishment (PE) in the U.S. through its limited U.S. activity as the treaty clearly says that “the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or delivery” in the U.S. is not considered PE. (Article 5, 4.b.) But as explained in the next point, the same company may find they are still subject to a state’s sales tax laws.
- States Are Limited in Their Ability to Impose Their Sales Tax Law: As just explained, even though our states are not bound by a bi-lateral tax treaty and are independent governments with their own sales tax laws, our states do have certain limitations placed on them by our U.S. Constitution. This is a complex topic which is worthy of its own blog article, but in general, a state can only impose its laws on an out-of-state (or out-of-country company) if that company has a sufficient “connection” or “tie” to that state. In the U.S. we use the term “nexus” to describe a sufficient connection or tie to a state. Having nexus in a state allows a state to subject a company to its sales tax laws and obligations – which may mean charging customers sales tax, filing sales tax reports and paying sales tax to the state. In general, nexus is created by any type of physical presence in a state, such as having an employee, a warehouse, a retail store, a plant, and including having any type of property, including inventory, in a state. In the example above, if the Swedish company stored its own product inventory in the state of California – the Swedish company would have nexus in California and would be subject to California’s sales tax laws.
Conclusion
In conclusion, it is important for foreign (non-U.S.) companies that are selling or plan to sell products and goods to U.S. consumers to gain a general understanding about U.S. sales tax. In today’s post I only touched briefly on four important key sales tax concepts, but, as noted above, several of these are worthy of their own post – and indeed I hope to return to provide additional and more in-depth articles.
The U.S. sales tax rules are complex even for U.S. based companies – and can be even more confusing for foreign companies. The fact that states are not a “party to” a bi-lateral tax treaty may be surprising to some foreign companies who have assumed that avoiding a PE means they will also avoid sales tax requirements. But the very activities that are “acceptable” and will avoid a PE, like storing inventory in a state, are activities that may subject a foreign company to a state’s sales tax laws.
