US sales tax - understand your nexus from consumer use tax

For remote businesses selling into the US, there is a whole new ecosystem of tax principles and terminology to learn which will have only limited resemblances to the VAT or GST you will be familiar with. These include: whether to tax in a particular state, city or county (‘nexus’); sales tax; consumer use tax; and seller use tax.

You will need to understand and follow all of these issues to avoid nasty tax audits, upset customers who have been charged tax incorrectly or fines. Here are the highlights of what you need to understand.

Nexus – where to tax and the Wayfair revolution

Nexus is the US sales tax term for the rules determining where a transaction should be taxed, and if a remote seller should register and collect taxes. It is similar to the European ‘place-of-supply’ concept for confirming in which country VAT should be charged on a cross-border transaction.

Until the Wayfair Supreme Court ruling in June 2018, having nexus, and an obligation to register and pay tax, was only established by having a substantial presence – ‘physical nexus’. This was interpreted as having staff or premises; but in some states a short-term sales field trip could trigger nexus.

The Wayfair ruling overturned this. It extended the obligation to tax remote sellers with local transactions – termed ‘economic nexus’. Almost all US states have this new rule implemented by the end of 2019, meaning foreign sellers are now responsible for the tax.

Most states have introduced a threshold, one of the key influences in the Wayfair ruling. Typically, this is for $100,000 to $200,000 sales per annum in the applicable state, or more than 200 transactions.

Taxability – how much to tax

The most complex area of US sales tax - taxability is the term that covers the concepts behind if and by how much a particular product or service is taxed in the 12,000+ states, counties and local jurisdictions. It includes:

• The sales tax rate of the product in the location of the customer;
• If the product is taxed fully, partially or not at all by the jurisdiction;
• If there are any sales tax holidays; and
• If the customer has sales tax exemption status.
• The variations in rates, and therefore taxability, between the states and tax jurisdictions are enormous.

Sales tax – turnover tax levied by states and local jurisdictions

Sales tax is a turnover tax on goods and services, administered by businesses who are liable for any uncollected taxes. It is levied by 45 states, plus DC. However, more than 12,000 states, counties, cities and other special jurisdictions have the right to tax in their locale.

Where liable, the seller must collect the taxes, hold on trust and remit with a regular return to the appropriate jurisdiction. Failure to follow the states’ requirements is a criminal offence. Fortunately for remote sellers, the states will generally collect taxes from them to distribute to the plethora of jurisdictions in their area.

Consumer use tax – taxing the missed sales

Where sales tax is not collected on a taxable sale, consumer use tax probably applies instead to ensure all state fiscal revenue is captured. The consumer use tax rates are generally the same as sales tax – although some states have some minor variances.

There are two common cases where consumer use tax applies:

1. Where a remote business did not tax a transaction. This could be because they are selling below the state registration threshold. States require their consumers to self-report their non-taxed transactions and pay the applicable tax. Around a dozen states require the business to comply with use tax notice and reporting requirements.
2. When in-state businesses use their own stocks, which were originally purchased tax free, for resale. Again, the business must self-assess, report and pay the tax to their state.