Fernway DiarySM

Mar 26, 2021

A foreign corporation that generates revenue from customers or establishes branch operations within the US, must comply with sales tax requirements in the US in, much the same manner as applicable to US-based businesses. US states generally require out-of-state and foreign sellers to charge, collect and remit sales taxes if that seller establishes a “sales tax nexus” within the state. Nexus simply means that the business has established sufficient presence in that state, in accordance with each state’s respective laws. There are a variety of factors that can determine whether nexus thresholds in a state have been met, and the applicable conditions may vary from state to state. Based on this, both US and foreign businesses are responsible for charging, collecting, and remitting sales tax in each respective state in which they have established nexus.

Factors that Establish Nexus

Conditions that may establish nexus vary from state to state. Some factors include (but not limited to) having a physical presence such as employees within the state, a corporate office, home office, warehouse, store, or other location in the state, or an affiliate in the state such as someone who mails products on behalf of the company via an online store. Additionally, scenarios in which the business has a relationship with a supplier to ship inventory to customers and/or stores goods for sale in a state may establish nexus in that state. For example, if you are a seller who makes use of third-party fulfillment services, your business will likely establish sales tax nexus in states where your products are stored for sale.

Legal Context

In 2018 the US Supreme Court changed the way state and local sales tax collection was practiced. In the South Dakota v. Wayfair decision, the Court removed the physical presence roadblock on the collection of state sales tax from remote sellers; in other words, it held that sellers who engage in a certain volume of economic transactions within a state may be required to collect and remit taxes, despite not having a physical presence within the state. In this particular case, South Dakota used a threshold of $100,000 of sales from the state or 200 transactions to establish economic nexus and trigger a sales tax filing requirement. Similarly, many other states have now enacted statutes that create a sales tax nexus threshold based on total gross receipts or the number of transactions. Though this case dealt with a domestic company, many states are now able to cast a wider net to incorporate foreign businesses into this regulatory requirement as well.

As laws changes, global businesses should adapt to compliance requirements in the US. Foreign companies should consider implementing new sales tax administrative and compliance processes. Fernway Solutions is committed to helping businesses navigate ever-changing legal and economic complexities by partnering with our clients and providing expert advice personalized to their needs.

Steps to Become Sales Tax Compliant in the US

Businesses that meet the criteria for nexus in a US state will likely be required by that state to register for a state sales tax permit and collect sales tax from all buyers in that state. Majority of the states require businesses to have a US tax identification number to register for this permit. Unfortunately, many states also have online registration processes that are not designed to seamlessly manage state registration and sales tax permit applications for businesses outside the US. Finally, most states will only accept sales tax payments through an automated clearing house (ACH) transfer from a US bank, and most US banks require a branch operation or domestically incorporated entity to open an account.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.