Anchin’s U.S. Expansion Playbook: Understanding Sales Tax Exposure for Foreign Businesses

Missed any of the earlier articles in our U.S. Expansion Playbook series?
Click here to read Part 1, Part 2, Part 3 and Part 4.

As mentioned in our previous article on nexus, State Tax Nexus: Sales and Income Tax Obligations for Foreign Businesses in the United States (U.S.), the U.S. does not have a Value Added Tax (VAT) or Goods and Services Tax (GST), but instead most states administer a sales and use tax system. Sales tax is a consumption tax, for which a seller is obligated to charge, and the end-consumer ultimately incurs the cost. Sales tax is governed by each state and municipality, rather than the Federal Government. As such, applicability, regulations, and rates for sales tax vary between each state within the U.S. How each state’s taxing authority applies sales tax rules also varies, but a key determining factor is nexus, as outlined in the previous article referenced above.

Sales tax is assessed on tangible personal property sold into a state, directly impacting business to customer (B2C) businesses. Business to business (B2B) sales may also be subject to sales tax rules, but businesses can alleviate their compliance responsibilities by obtaining a certificate of exemption from their customers.

It is becoming more common for states to assess sales tax on certain types of services and software-as-a-service (SaaS) based businesses. When a foreign business performs a service or engages in SaaS, the sales tax rules are often based on where the service is received by the customer. For example, a foreign consulting business with customers in the U.S. may still have sales tax obligations even though the services associated with the consulting service are performed outside the U.S.

When considering nexus and whether sales tax will apply, it is important to note that you do not need to have a physical presence or an actual U.S. entity established to be liable for a state’s sales tax. If you are already selling products to U.S. customers or U.S. businesses, you could have economic nexus, which applies to foreign businesses in the same manner as it does to U.S. entities. Several states have minimum gross revenue or sales requirements for economic nexus, which can help limit a foreign business’ potential exposure to sales tax. A foreign business, either directly or through its U.S. subsidiary, may have compliance requirements depending on the amount of revenue generated in a state and any sales tax liabilities incurred there.

Given the above, a foreign business that was servicing U.S. clients before establishing a U.S. subsidiary may potentially be subject to sales tax in one or more states. Although this will not prevent the business from establishing an entity or presence in the U.S., it should be considered as part of the process to ensure the business knows if there are any potential historical filings that a specific state may assess on it in the future for prior non-compliance.

For more information on how U.S. sales tax rules may impact your overseas business or guidance on compliance considerations, please reach out to Kevin Brown or Gwayne Lai of Anchin’s International Tax Group, Alan Goldenberg of Anchin’s State & Local Tax Group, or your Anchin Relationship Partner.

Stay tuned for the next installment of our U.S. Expansion Playbook series, which will cover key operational issues to consider when expanding your business into the U.S.