
Sales tax regions in United States
Companies predominantly operating within the European Union (EU) or the United Kingdom (U.K.) are accustomed to encountering consistently applied tax rates. Consider Germany, for instance. In most cases, businesses in Germany contend with merely three distinct VAT rates: the standard rate, a reduced rate, and a 0% rate applicable to specific tax-exempt transactions.
Regrettably, this uniformity in EU VAT rates does not extend globally. Consequently, when British and European businesses decide to venture into U.S. markets, they confront a substantial tax challenge: the vast array of diverse tax rates.
In the United States, there are over 13,000 jurisdictions imposing sales and use taxes. Each of these jurisdictions features multiple tax rates that may undergo frequent changes contingent upon economic circumstances. With such complexity to navigate, many international businesses embarking on U.S. trade find themselves grappling with U.S. tax compliance.
What constitutes a sales and use tax jurisdiction?
In the EU and U.K., value-added tax (VAT) is levied nationally, resulting in different VAT rates across countries. Tax payments are remitted to national tax authorities. Conversely, in the U.S., sales tax is determined at both the state and local levels.
Local sales tax rates can be intricate, given the existence of more than 13,000 U.S. sales and use tax jurisdictions. Essentially, these jurisdictions are defined geographic areas within which businesses must adhere to the tax rates established by the relevant tax authority for that specific area. Typical examples of U.S. sales and use tax jurisdictions encompass cities, counties, and special regions empowered to levy distinct sales tax rates.
Three essential steps for U.S. sales tax compliance:
Registration
The process of registering to collect sales tax in the U.S. comprises three fundamental steps. The initial step involves determining whether your business has established nexus (tax liability) in a particular tax jurisdiction. 'Nexus' is the American term for this concept—if your business has a presence in a specific state or county, you are legally obligated to apply sales tax to transactions occurring in that jurisdiction.
Nexus can be established either economically (based on sales volume within the area) or physically (linked to your business's physical presence in the area, such as stores or warehouses).
The second step entails researching the registration process of the pertinent tax jurisdiction. While not every jurisdiction will have a unique registration process, the procedure in one state may vary from that in a neighboring state. Therefore, it is advisable to investigate the procedures before initiating the completion and submission of documents.
The final step involves the actual registration process. Assuming that you have conducted your research, this phase should proceed relatively smoothly. However, it can be time-consuming if you need to register in multiple jurisdictions. Therefore, it might be beneficial to ask Duni EFF to help you with this matter.
Calculation
The definition of a digital good for tax purposes differs significantly between the EU and the U.S. In the EU, there are four specific criteria that determine a digital good:
It is not a physical, tangible good
It relies on information technology and would not exist without technology
It is delivered via the internet or an electronic network
It is fully automated or requires minimal human intervention
While these criteria align reasonably well with U.S. standards, the American definition is not as definitive and can vary between states. For example, Colorado imposes taxes on most digital goods but exempts video games. Conversely, Illinois follows the opposite approach. Rhode Island and Indiana do not even classify digital photos as software, making them tax-exempt.
Five states do not levy general sales tax, and several states specifically exempt digital goods from taxation. Effectively navigating the sale of software in the U.S. without grappling with tax compliance requires research. You must understand how specific states are likely to apply digital sales tax.
Tax Remittance
Achieving U.S. sales tax compliance culminates in the final step of remitting collected taxes. This step should be straightforward if you have accurately completed the preceding steps. However, you must be highly attentive to timing. Although the U.S. operates on a federal tax year, different jurisdictions establish distinct rules for tax due dates. Additionally, they set their own guidelines regarding the frequency of tax return submissions.
Furthermore, the method for remitting taxes should not be overlooked. Even if your business operates entirely in the digital realm, you may have established nexus in a county that necessitates the filing of physical tax returns. While researching your nexus locations, ensure that you thoroughly investigate the rules governing tax returns and remittance in the jurisdictions where you have tax obligations.
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Ian Knapton
UK Sales Director