A handy guide to U.S. sales tax jurisdictions
Businesses that primarily operate in the EU or U.K. are likely used to very consistent tax rates. Take Germany, for example. Except in special circumstances, businesses within Germany will only have to deal with three different VAT rates: the full rate, a reduced rate, and a 0% rate for certain tax-exempt transactions.
Unfortunately, the consistent nature of EU VAT rates is not an international phenomenon. So, when British and European businesses decide to start trading in the U.S., they’re faced with a considerable tax challenge: the enormous number of different tax rates.
In the U.S., there are over 13,000 sales and use tax jurisdictions. Each of these jurisdictions will have multiple tax rates, which may also change frequently depending on economic circumstances. With so much to keep track of, many international businesses trading in the United States for the first time end up struggling with U.S. tax compliance.
Luckily, Avalara is here to help. This blog will serve as a handy guide to U.S sales and use tax jurisdictions, providing a handy definition for these jurisdictions and advice on how to stay tax compliant in the U.S.
What is a sales and use tax jurisdiction?
In the EU and U.K., VAT is levied at a national level, which means different countries have different VAT rates, and tax is remitted to a national tax authority. In the U.S., sales tax is set at both the state level — 45 of the 50 states levy sales tax — and the local level.
Local sales tax rates can be tricky since (as we mentioned) there are over 13,000 U.S. sales and use tax jurisdictions. In simple terms, these jurisdictions are set areas within which businesses must apply whatever tax rates are set by the tax authority of that set area. Common examples of U.S. sales and use tax jurisdiction include cities, counties, and special jurisdictions that are allowed to levy specific sales tax rates.
Three steps to U.S. sales tax compliance
There are three steps to registering to collect sales tax in the U.S. The first step is determining if you have established nexus in a particular tax jurisdiction. ‘Nexus’ is the American term for tax liability — if you have established in a particular state or county, you have a legal obligation to apply sales tax to any transactions made in that jurisdiction.
Nexus can either be economic (i.e. tied to the amount of sales made in the area) or physical (i.e. related to the physical footprint your business has in the area, like stores or warehouses). Check out our state-by-state guide to sales tax nexus for more information.
The second step is researching the registration process of the relevant tax jurisdiction. Not every jurisdiction will have a unique process for registering, but the procedure in one state is likely to differ from that in a neighbouring state.. As such, it’s a good idea to look into how everything works before you start completing and submitting documents.
The final step is completing the registration process itself. Assuming you’ve done your research, this should be fairly straightforward, but it can be time-consuming if you need to register in a number of different jurisdictions. Luckily, solutions exist that allow you to automate or outsource the process: for instance, Avalara’s sales tax registration service lets you register in multiple states by completing a single form.
The way the EU and U.S. define a digital good (for tax reasons) differ significantly. In the EU, there are four specific criteria that define a digital good:
- It's not a physical, tangible good.
- It’s based on IT, and could not exist without technology.
- It’s provided via the internet or an electronic network.
- It’s fully automated or involves minimal human intervention.
While these criteria are fairly accurate within the U.S., the American definition is not as definitive and varies between states. For instance, Colorado taxes most digital goods but exempts video games. In Illinois, the opposite is true. In Rhode Island and Indiana, digital photos aren’t even defined as software, so they’re tax-exempt.
There are five states that charge no general sales tax, and in addition, there are several states that specifically do not tax digital goods. The key to selling software in the U.S. without having to worry about tax compliance is research — you need to know how particular states are likely to apply digital sales tax. If you don’t have a strong background in U.S. tax law, you can contact Avalara for some expert advice.
3. Remitting tax
The final step to U.S. sales tax compliance, remitting collected taxes, should be simple as long as you’ve completed the other steps correctly. That said, you need to be very aware of your timing. Although the U.S. has a federal tax year, different jurisdictions will have particular rules for when taxes are due. Similarly, they’ll have their own rules on how often you need to submit tax returns.
Additionally, be aware of your method of remitting taxes. Even if you’re an entirely digital ecommerce company, you might have nexus in a county that requires you to file a physical tax return. While researching where you have nexus, take care to look into the returns and remitting rules in the areas where you have a tax obligation.
Ensure U.S. tax compliance with Avalara’s digital solutions
The U.S. market presents a valuable opportunity for EU businesses looking to expand into lucrative foreign markets. However, it’s tough to do so without help. Contact Avalara today to find out how we can support the growth of your business and direct you towards success.
If you’re interested in more tips for how to succeed in the U.S. as an international business, click here to download our guide to selling into the U.S.
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