U.S. tax compliance can seem challenging and daunting for many businesses. This is true not only for income tax compliance but for other types of taxes as well. One type of tax that can be both challenging and daunting and which can expose a business to significant penalties and interest is sales tax. This article provides a brief overview of sales taxes in the United States to help management understand compliance responsibilities and to highlight a compliance pathway for businesses.
The Big Picture – Sales Tax in the United States
The Tax Foundation reported in 2020 that there are more than 11,000 separate taxing jurisdictions for sales tax in the United States.1 More importantly, the requirements to file (i.e., known as nexus) in each jurisdiction are generally not uniform and may vary significantly. Welcome to sales tax in the United States!
The general requirements for sales tax compliance in the United States have also changed significantly in recent years. The catalyst for this period of rapid change was a 2018 Supreme Court decision known as the Wayfair decision. In brief, the general rule prior to Wayfair was that a business had to have property or employees in a jurisdiction in order to create nexus. After Wayfair, a business doesn’t have to have any type of physical presence in a jurisdiction to have nexus. Most states, for example, have both a sales threshold and a number of transactions threshold for establishing nexus. These thresholds are referred to as economic nexus. A business would have to register and begin filing sales tax returns if they meet either threshold. In addition, there are other types of nexus that may apply such as affiliate nexus and click-through nexus. Businesses, therefore, have to be aware of state and local filing requirements and monitor their business activity continuously to ensure they are properly managing sales tax compliance.
Once a business has established that it has a requirement to file, there are two types of taxes it may need to report and pay. The first is sales tax and the second is use tax. If a business sells a product to an end user, it collects and pays sales tax. If the same business uses some of its inventory for internal purposes (e.g., used for demonstrations at trade shows) rather than selling it, the business will owe use tax on the value of the products that are used internally. This is the basic difference between the two types of taxes.
A business may have customers who are exempt from sales tax. For example, a customer who will resale the product they are buying will likely be exempt for purposes of sales tax. The customer will simply need to provide the business with a resale certificate in order to receive this exemption. The business has a responsibility to obtain valid exemption certificates for all customers who are not charged sales tax. Other common exemptions categories include tax-exempt organizations and manufacturers who purchase to use a product in the production process.
There are currently five U.S. states that do not have a state sales tax. 2 These states are Alaska, Montana, Oregon, New Hampshire, and Delaware. Of these five states, Alaska is the only one that has local sales taxes.3
Evaluating Risk Exposure
There are very real risks and consequences for your business if sales taxes are not handled properly. The statute of limitations defines the period during which a jurisdiction can audit and charge additional sales tax. Generally, states have a statute of limitations of 3 or 4 years and this period is generally measured from the later of the due date of the return or the date the return is filed. However, the statute of limitations is generally expanded or may have no limitation in the event a business has not been filing returns. In the event of an audit, a business will likely be assessed interest and penalties in addition to the sales taxes that may be charged.
Hire a local accounting partner for US Sales tax compliance
If you are a Japanese-owned company operating in the U.S., sales tax is an area where working with a local accounting firm can provide benefits. XPECT Japanese Business Services are designed to support the unique and specific needs of Japanese subsidiaries operating in the United States. XPECT is focused on helping businesses optimize business strategy, enhance operational effectiveness, and successfully leverage accounting as a strategic tool so that business leaders can focus on the strategic aspects of growing the business and achieving business goals. Learn more.
1 “How Many Sales Tax Jurisdictions Does Your State Have?” Tax Foundation, 14 Oct. 2020.
2 Moreno, Tonya. “5 US States Without a Statewide Sales Tax.” The Balance, 24 Jan. 2023, www.thebalancemoney.com/states-without-a-sales-tax-3193305. Accessed 10 May 2023.
3 Fritts, Janelle. “State and Local Sales Tax Rates, 2022.” Tax Foundation, 3 Feb. 2022, taxfoundation.org/2022-sales-taxes/#local. Accessed 10 May 2023.