US sales tax is set by each state, not the federal government. A seller has nexus, the obligation to register and collect, through physical presence or through economic nexus: exceeding a state's sales threshold, commonly US$100,000 a year into that state. Since the 2018 South Dakota v. Wayfair decision this can apply to foreign sellers with no US presence.
For UK, Canadian and European businesses, US sales tax is one of the most confusing parts of selling into America. There's no single national system: 45 states and Washington, D.C. levy a statewide sales tax, and many cities and counties add their own.
What is nexus?
Nexus is the connection with a state that obliges you to register, collect and file sales tax there. It can come from:
- Physical presence: an office, employees, or inventory in a warehouse (including some fulfilment centres)
- Economic nexus: sales into the state above its threshold, even with no presence
Economic nexus after Wayfair
In South Dakota v. Wayfair (2018), the US Supreme Court allowed states to require out-of-state sellers to collect sales tax based on sales volume alone. Most states now use a threshold of around US$100,000 in annual sales into the state. Some also count the number of transactions, and a few use different amounts. Check each state's current rule.
A step-by-step approach
- Map your US sales by state over the last 12 months and the current year
- Compare them with each state's threshold and note how each state measures it
- Separate marketplace sales (often collected by the platform) from direct sales
- Check product taxability. Digital goods, SaaS and clothing are treated differently by state
- Register before you collect. Never collect tax without a permit
- Configure your checkout to calculate the correct rate by destination address
- File returns on each state's schedule, whether monthly, quarterly or annually
Common mistakes
- Assuming that having no US entity means no US sales tax
- Ignoring states where you've crossed the threshold through marketplaces plus direct sales
- Charging one flat rate instead of destination-based rates
How Avore Solutions can help
We review cross-border tax exposure, manage state registrations and filings, and our ecommerce developers can set up tax-correct checkout. Book a review.
Frequently asked questions
Do foreign companies have to collect US sales tax?
They can. Economic nexus rules generally apply based on sales into a state, regardless of where the seller is based, so a UK, Canadian or EU business that exceeds a state's threshold may need to register there.
Do marketplaces collect sales tax for me?
In most states, marketplace facilitators such as Amazon must collect and remit sales tax on sales made through their platform. Direct sales from your own website are still your responsibility.
Is US sales tax the same as VAT?
No. US sales tax is generally charged once, at the final sale to the consumer, and rates and rules vary by state and locality. VAT is charged at each stage of the supply chain with input tax recovery.