Avoid these common mistakes when selling into the U.S.

If you establish a connection between your business and a U.S. state — known as ‘nexus’ — you must collect U.S. sales tax on the sales you make to buyers in that state, unless state rules say otherwise.

Businesses used to establish nexus in a state by having a physical presence within it, such as an office building or warehouse. However, since the 2018 Wayfair decision, which held that businesses with no physical presence in a state can be required to collect and remit U.S. sales tax on online orders, most U.S. states have passed laws that have changed the game for online sellers. These laws mean you could have nexus in a state even without a physical presence there.

Now, sellers not only have to follow the rules of the 45 states with U.S. sales tax laws, but somehow have to keep track of the rules and requirements of over 12,000 jurisdictions within those states. To make things harder, the rates vary and can frequently change. There is no national rule that applies in all states.

The complexity doesn’t stop there. Although marketplace facilitator laws require online marketplaces — such as Amazon — to collect U.S. sales tax on sales made by sellers on their platforms, this doesn’t mean you can forget about your U.S. sales tax obligations if you sell on a marketplace. A number of states may count the sales you make on marketplaces when calculating whether you’ve reached its nexus threshold or not. In some states, your total marketplace sales count towards the state nexus threshold, while others do not. Not keeping track of each state’s rules on whether to count marketplace sales in the nexus calculation could mean you fail to fulfil your obligations. 

The rules — or more accurately, the lack of consistency in the rules — make it easy to establish nexus in a particular state without realising it, or misunderstand the threshold. As you’ve no doubt gathered, keeping up with ever-changing nexus rules in every state is near impossible.

People used to read books, listen to CDs, records, or cassette tapes, and play computer games that came in boxes. Although these formats are still purchased and used, entertainment can now be downloaded as digital files to a phone or computer (maybe this explains the popularity of unboxing videos among the younger generation). U.S. sales tax no longer only applies to things you can hold or touch, but intangible goods too.

Over 20 U.S. states tax some digital goods, but what each state taxes and at what rate varies. Some states exempt digital games but tax other digital products, whereas other states do the reverse. A number of states also base their tax rates on where the buyer is located, while others do so on seller location. These inconsistencies make it difficult to know when to tax a transaction and at what rate.

You may think that getting customers to click the buy button would be the end of the confusion. But there’s another step to consider — delivery charges.

Although states tend to only tax delivery charges when you’re sending taxable items, things can get complicated when you’re shipping a mix of both taxable and non-taxable goods. In this instance, the portion of the delivery fee associated with the taxable products is subject to tax.

In some states, whether the delivery charge is taxable or not depends on if it was separated from the cost of the product on the invoice. Some states exempt the delivery charge from tax if it’s separated in this way, but others do not. It could be the case that in one particular state, a delivery charge that’s separated on the invoice is exempt from tax if the order is delivered by a common carrier, such as FedEx. But it’s taxable if the seller delivers the parcel in their own vehicle.

Although marketplace facilitator laws may make things easier for sellers by placing the burden of tax compliance on marketplaces, you may still have obligations to fulfil if you’re storing inventory in the warehouse of those marketplaces — such as the 1,250 warehouses Amazon has in 40 U.S. states. Doing so could trigger a requirement for you to register with the state, even if the marketplace operator remits tax revenue. In some states, you must register for U.S. sales tax whether you have inventory in that state or not. In other states, you only need to register if you have inventory.

If you are storing items in a warehouse in the U.S., and another seller sells the exact same item, Amazon could take the item from your inventory if, for example, it happens to be located closer to the buyer. Although your inventory will be replenished, this practice — known as ‘commingling’ — is another way you could establish nexus in a state without realising it.

If you sell over $600 of goods and/or services on an online marketplace in a year, you’ll receive a 1099-K form — a report of payments you receive from your online sales — from the marketplace. This information will go to the Inland Revenue Service (IRS), the U.S. equivalent of HMRC.

The 1099-K only reports gross revenue, not costs. If you sell via a marketplace, you should keep track of the cost of the goods sold as well as other expenses such as marketing and shipping. The net revenue after deducting costs is what the company should pay tax on, not the gross revenue on the 1099-K.

The 1099-K will also capture sales to buyers exempt from U.S. sales tax. You should keep track of what portion of your marketplace sales are exempt, otherwise you could pay more than you owe.

Although U.S. shoppers have been returning to physical stores, online sales continue to rise. The U.S. government is unlikely to slow down its efforts to ensure online sellers are paying what they owe, and sellers who neglect their U.S. sales tax compliance strategy could face fines, audits, and general disruption that’s likely to jeopardize their success in the U.S.

Though both U.S. and non-U.S. sellers overwhelmingly favour a simplification of U.S. sales tax rules across the U.S., it’s highly unlikely the rates and rules will ever become uniform.

If you’re selling in the U.S., or plan to, you’ll have to navigate a complex landscape of frequently changing rates and rules, where fulfilling your compliance obligations is near impossible without the right tools to help you.

Avalara can help to ease stress and uncertainty by tracking your sales, working out if you’ve established nexus, and alerting you when you’re approaching the threshold of each state you’re selling in. Avalara can also let you know if your digital goods (if you sell them) are taxable or not, and where they’re taxable, and keep track of each state’s rules so you don’t have to. The same software can also determine whether and how much of a delivery fee is taxable, apply the correct fees, and report the delivery taxes collected.

Take our U.S. sales tax risk assessment to discover if you’re registered for U.S. sales tax everywhere you should be.