Sales Tax Fundamentals
Get up to speed on the basics of sales tax
What International Sellers Need to Know about Sales Tax in the U.S.
byAugust 20, 2014
Editor’s note: Parts of this blog post may be out of date now that economic nexus has been declared Constitutional. Read an up-to-date post about sales tax for international sellers here.
We can all agree that sales tax laws are tricky even for U.S. sellers who only sell domestically. So when we began getting U.S. sales tax nexus questions from sellers located in Canada, Europe and around the world, we knew we’d better consult an expert.
We caught up with Sylvia Dion, CPA, a State Tax Consultant who works with many international sellers selling into the U.S. through Amazon FBA, drop shipping or various other ways. She graciously answered the questions our international selling customers most commonly ask about sales tax nexus, tax treaties, registering for sales tax, and more.
Q: Do international sellers who sell into the United States have sales tax nexus? When do they and when don’t they? How does an international seller determine if they have sales tax nexus in the United States?Sylvia: Thank you posing this question! For the past year, I have been writing about “U.S. Sales Tax for Foreign Sellers” for SalesTaxSupport.com’s Industry blog. A while back I wrote a post that dealt with Tax Treaties and U.S. Sales Tax and explained that just because an international seller is from a country that has a tax treaty with the U.S., that international seller could still be subject to the sales tax laws of the states where they have “nexus.”
If an international seller owns inventory in a state and uses a third party fulfillment service (such as Amazon’s FBA service) that international seller has nexus to the state where inventory is situated and fulfilled from. The seller has a physical presence (owns inventory) in the state and is using an agent to perform a service on their behalf. The Tax Treaty post I wrote has drawn many, many questions from international sellers – many that are surprised to find out that they have sales tax nexus if they have inventory or use an agent in the U.S.
Another question I’ve seen from international sellers is when do they not have nexus? Nexus is a complicated issue, but in general, if they are fulfilling their own orders from overseas then they will avoid the nexus that is created when using Amazon’s FBA service.
Q: Once an international seller has determined they have sales tax nexus in the United States, what’s the next step?
Sylvia: If an international seller wants to comply with the U.S. sales tax laws, they should get registered with each state where they have nexus.
This is not always easy for international sellers because most states require an international seller to register by sending in a paper registration form and often there are calls that have to be made to the states – not an easy thing to do from overseas. My recommendation is to work with a U.S. sales tax professional who can handle this process for them. This is a service that I provide to international sellers. (Editor’s note: Find out more about Sylvia’s services at her firm’s website, PrietoDion Consulting Partners LLC.)
Q: Does an international seller need a registered agent in the United States? In every state where they have nexus? If not, how do they find out whether they need one?
Sylvia: The term ‘registered agent’ can be very confusing to international sellers who think of an actual “agent” that has lots of authority to enter into contracts for them, etc. But what we are really talking about is registering with the Secretary of State in the various states – which is a different State agency from the agency that an international sellers needs to register with for sales tax purposes. Whether they have register with a Secretary of State’s office depends on the state.
It helps to have someone on your side because getting registered as a foreign seller often takes time, phone calls and a lot of follow up, which, like I said before, can all be very difficult if you have a time zone difference and also because not every state calls their taxing authority by the same name. In some states this agency is the “Department of Revenue” but in other states it is called the “Division of Taxation”, the “Department of Tax and Fee Administration” or the “Comptroller’s Office.”
When I help international sellers with the registration process, I often recommend that they give me a limited power of attorney so I can speak with and respond to the various states on their behalf. I explain that many states are strict about speaking only to an officer or employee of the company that is registering. So again, giving me a power of attorney saves them time spent on making international calls.
Q: Does an international seller need a bank account in every state?
Sylvia: Definitely not in every state. But does an international seller need a U.S. bank account? It will make things easier for the seller when it comes time for them to remit the taxes that they have collected in the nexus states. But, no, not in every state.
Q: What would be the first step an international online seller must take to get started complying with state sales tax laws?
Sylvia: Before anything else, an international seller should determine where they have nexus. If they have nexus, then they are just like any other U.S. out of state seller and must take steps to comply.
The next step is to get registered for a sales tax collection purposes. But here again, there is more confusion for international sellers because they may not know exactly what they are registering for. In some states, the international seller is registering for a sales tax permit, in others it is a use tax permit and in others it is a business license.
Many of my clients ask about collecting sales tax before they are registered. I always tell them that’s a huge “no-no.” Most states consider collecting sales tax before you are registered to be a criminal act.
Q: Are there some states that are friendlier than others to international online sellers when it comes to sales tax?
Sylvia: I wouldn’t say there is any bias against international sellers specifically. That is to say that I have not heard of states that are targeting international sellers just because they are international seller. There are some states that are more aggressive with out-of-state sellers, but that applies to anyone – whether they operate from another state or another country.
If a client has nexus in many states, we may first try to focus on the ones that are known to be tougher on out-of-state sellers (which includes international sellers). This may be because they have a stronger audit staff or have allocated more resources toward going after sellers who are out of compliance. The states that immediately come to mind are California, New York, Texas, Illinois, Florida and Massachusetts.
Q: Is there anything I didn’t ask about that online seller need to know when it comes to complying with U.S. sales tax laws?
Sylvia: Well, we have already talked about the “tax treaties” issue. Many international companies think that they don’t have to comply with U.S. sales tax because their country has a tax treaty with the U.S. Unfortunately, this simply isn’t true.
Tax treaties with the United State are federal treaties, while sales tax is a state matter. While tax treaties protect international sellers from having to file federal taxes, such as form 1040 for income tax, they don’t protect against state levied taxes. And, unfortunately, sales tax is one such tax.
But here’s another thing I’d add – which is another very confusing topic. Even though the international seller may not have to file U.S. federal taxes, the international seller needs to obtain a Taxpayer Identification Number from the Internal Revenue Service, our federal taxing agency. The international seller may need to obtain an Employer Identification Number (EIN) or an Individual Taxpayer Identification Number (ITIN).
Q: What would happen to international sellers if the Marketplace Fairness Act (MFA) is passed?
Sylvia: Foreign companies think that the MFA isn’t going to apply to them, but it is! But in actuality, the “remote sellers” mentioned in the wording of the Marketplace Fairness Act can be “out of country” just as easily as they can be “out of state.” International sellers will have to comply should this act pass.
We want to extend a huge thanks to Sylvia Dion for stopping by the blog and sharing her expertise. If you are an international seller, or simply have a question for Sylvia, please start the conversation in the comments.