U.S. Sales tax for UK and EU companies: A Guide for Navigating the Complexity

In our latest blog, we’ve put together some of the key points to consider as you get started.

First of all, what is U.S. sales tax?   

U.S. sales tax is an Indirect tax. The tax is assessed on products, services, or both, for items that are consumed or used. In this way U.S. sales tax is similar to the Value Added Tax (VAT) taxation mechanisms across the UK and the EU - such as Mehrwertsteuer or Umsatzsteuer (sales tax in Germany), Taxe sur la Valeur Ajoutée or TVA (sales tax in Belgium), Belasting Toegevoegde Waarde or BTW (sales tax in the Netherlands). However, there are also some fundamental differences between sales tax and VAT laws in each country. So, when it comes to U.S. sales tax for UK companies and EU businesses there are a number of important differences to address to ensure compliance.

There’s no Federal, United States sales tax 

Value Added Tax (VAT) is set at a country level and is largely recoverable. In the U.S. there’s no standard rate and no recovery for sales tax. All U.S. states have the ability to dictate the sales tax rates and regulations in their jurisdiction which creates an extremely complex tax landscape. Your business may need to stay ahead of over 12,000 state and local tax jurisdictions. 
  
In each of the 45 states where sales tax applies (5 states do not apply sales tax) there are different sales and seller’s use tax rates and regulations. Rates and regulations at state, county, district and city level may vary based on product types and services; and depend in large part on supply, ship from, and jurisdiction reciprocity rules. These create the ‘combined sales tax’ rate - which in recent years has been up to as much as 12.75% and down to 0% in exempt scenarios. 

Location, location, location 

Determining the location of the sale is the big question for EU and UK companies trading in the US. Historically the bricks and mortar of the sale, known as the ‘physical presence standard’ triggered a sales tax obligation. But, with the growth of marketplaces and ecommerce, a supreme court decision in 2018 known as Wayfair caused a fundamental change to the test for an economic connection - a ‘nexus’ - with the state.  
  
The Wayfair ruling enables individual states to collect U.S. sales tax even if your business isn’t physically present in the state, creating a more level playing field across all distance selling scenarios. The result is that today most states have moved to a destination-based sales tax system, based on buyer location, but no less dependent on the ship from location to determine the correct rate.  
  
Once you’ve determined where the sale has taken place you need to register for sales tax collection - from state to local level. For example, in the state of Pennsylvania sales tax is 6% but in the city of Philadelphia only 2%. A UK business will need to register with the state and to collect 6% and the city to collect 2%. Each and every transaction must assess the sales tax and include on the invoice to the buyer that shipped, consumed, or used the products or services in the taxing location.  Again, specific thresholds and requirements vary, but fundamentally if your business reaches a jurisdiction’s defined level of sales revenue or defined transaction number, you must collect and remit US sales tax. 

Discovering what products and services attract US sales tax can be tricky 

Businesses need to keep in mind that different products and services attract a different sales tax rate and can create a new compliance implication. Determination is not always simple and logical.  Sales tax determination for food items, for example, is often very complex. Sometimes food can be sales tax exempt. In other states there will be different rates for different food types - sweets or ‘candy’ will attract a different rate compared to takeaways or unprepared foods.   
  
Take a much-loved sweet treat, the Kit Kat, for example. Classification for this product will vary depending on whether you’re in New York or Washington. This is because some states, like New York, consider it to be ‘candy’ (confectionary).  Others, like Washington, consider it a ‘bakery’ item, because of the wafer content.  
 
The point to remember is there’s no consistency throughout the country.  Different perceptions, right down to those in local jurisdictions, impact definitions for even what you may think is a simple chocolate bar. So, it’s hard to get it right. 

Don’t forget about exemption certificates

Sales tax exemption certificates are documents that are often required for certain types of sales transactions in order to avoid paying sales tax where it doesn’t apply. Exemption certificates are needed in many scenarios such as trading in the not-for-profit sector, with the government, selling to a retailer or someone purchasing into inventory or for R&D. Exemptions also exist for out-of-state business and multi-stage manufacturing - where sales tax is paid by the end consumer on what has been made.  
  
For each transaction it’s the responsibility of the buyer to create the certificate and pass it to the seller, to show the transaction does not attract sales tax. In these scenarios your business will need to have the right exemption certificates in place to avoid compliance penalties and fines. For example, a company based in Europe selling car parts to a US manufacturing company needs to make sure they receive the correct exemption certificates to document the exemption and so avoid paying unnecessary sales tax or fines. On the other hand, if your business is the manufacturer then, the role will change. As a buyer of parts, it will be up to you to determine whether each specific, tangible element is subject to sales tax. You’ll then need to create the relevant exemption certificates. Automation can help you create track and check. It can prove accuracy in a tax audit situation and validate why sales tax doesn’t appear on the invoice.  

The sales tax system creates a level of complexity that can divert you from your core business activities and growth aspirations.  

Vertex can help with this challenge. Vertex O Series for sales tax is our transaction-based solution that integrates with your ERP systems, pulling transactions and determining what sales tax applies. Plus, there are many niche add-ons to help with your industry sector specific challenges - such as Vertex O Series Certificate centre to automate exemption certification. With our trusted tax technology in place, we help businesses overcome the challenges and effectively manage sales tax to support growth.