Four must-know pitfalls of US sales tax

As a non resident business, selling in the USA is a huge growth opportunity. That being said, there are two sides to the coin here. Selling in a market as large as the United States can rake in a large amount of profits. But being unaware of USA indirect tax policies can take a considerable bite out of those profits. Here are some common US sales tax pitfalls for non resident Indian businesses and how to overcome them.

Pitfall 1# Not knowing about the many sales tax jurisdictions in the USA

Sales tax in the USA doesn’t operate at a federal level. In fact, sales tax policies can change between individual states. Within these individual states, sales tax policies might change at city, county and even municipality levels. This brings the total number of sales tax jurisdictions in the United States to a whopping 13,000 jurisdictions. Some jurisdictions might tax certain goods and services while some might exempt certain goods and services. Fundamentally, each jurisdiction might have varying tax policies, tax rates and tax deadlines. As an Indian business selling into the United States, it is your team’s job to keep accurate track of your customer’s location in order to file the tax charges correctly. There are instances of tax policies changing between streets - so you can imagine how difficult it can be to keep track between jurisdictions. An important step to remember is to avoid manual tracking. With as many as 13,000 jurisdictions, manual tracking will increase the risk of human error. Using automation software solutions can help your business easily manage this potential pitfall.

Pitfall 2# Not knowing about the USA's sales tax economic nexus.

One of the essential aspects of the USA's indirect tax obligations is their economic nexus. It is also important to know when your business might hit this nexus and what happens when you cross this threshold. First, let’s understand what a nexus is. In a nutshell, a nexus is having a significant presence in the state. In the U.S, individual states require businesses to charge sales tax if that business has a nexus in the state. Let’s understand what are the factors that contribute to creating a nexus. A business will have reached an economic nexus when it has a physical presence in the USA i.e. it has a specific office, warehouse, factory or a store. Other factors that contribute to this economic nexus is the presence of personnel like employees, contractors etc. If your non-resident Indian business is simply sending products to the USA, you must remember, storing goods for sale in a state also contributes to a sales tax nexus. Once your business reaches or crosses this nexus, you will be liable to collect and consequently file sales tax. This means you will be required to apply for a sales tax permit. On obtaining a sales tax permit, the state will assign you a filing frequency. This is usually on a monthly, quarterly or annual basis. The higher your revenues from the business, the higher your frequency of filing sales tax returns. Avalara can help your business review and determine its nexus footprint in each jurisdiction and help you register for sales tax.

Pitfall #3 Not knowing the live tax rates and tax deadlines

Not knowing the right tax rates can put your business in a tight spot. It is important to be aware of the right tax rates as per jurisdiction. Additionally, it is very important to know of the tax deadlines so that you can file the returns on time. Staying on top of fluctuating tax rates in different jurisdictions and filing returns at the right time might not be easy to handle manually. Let’s just say keeping up with the Kardashians might be easier. Avalara’s AvaTax and Returns software can help you easily manage and keep track of currently due and upcoming sales tax liabilities.

Pitfall #4 Not opening a US bank account upon crossing the economic nexus

Although this pitfall might not be as significant as the others, it can have major repercussions. Your business can do everything right - it can keep track of its customer’s tax jurisdiction and it can register for a sales permit and collect sales tax. However, if your business is unable to file and make the sales tax payments, it is essentially committing a tax and compliance violation. Note that sales tax payments in the United States are routed through ACH or Automated Clearing House transfers. Your business will need a bank account in the USA to make that happen.

While managing sales tax policies in the USA can be complicated and might require a dedicated team, employing automation software solutions can help you considerably reduce the risk of compliance violations. That allows you to focus on what really matters - making profits.

Recent posts
Sales tax compliance for Digital Services simplified (for the US)
7 things to avoid while selling online- tips for running a successful omnichannel retail store
Five Cross-border compliance challenges for Manufacturers

Prepare your business for e-invoicing under GST

Discover how to meet all compliance requirements while integrating e-invoicing into your tax function.

Prepare your business for e-invoicing under GST

Stay up to date

Sign up for our free newsletter and stay up to date with the latest tax news.