Do Foreign Companies Have to Deal with US Sales Tax?

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Here at LedgerGurus, we have become industry leaders in helping ecommerce businesses to go from being confused, scared, and stuck about doing their sales tax wrong, to feeling clear and calm and knowing exactly what they need to do about sales tax, so they can boldly expand their business with confidence. So let me help you with that as well. And let's dive in.

1:15 Physical nexus

I want to first talk about what creates a filing and registration obligation for ecommerce sellers in the US market. If you are an international seller, there are three types of nexus you need to worry about.

So nexus simply means a connection with a state. In the US, instead of the whole country as a whole administering sales tax like the VAT, every single state has its own rules and requirements for sellers.

So first you need to worry about whether you have physical nexus into a state. Do you have people that you hire that are helping you with your business that live in the US? Do you have an owner in the US? Do you lease any equipments or properties? Use a 3PL in the US? All of these will create physical nexus for you. So then you will need to register in the states where you do have physical nexus in.

2:09 Economic nexus and state thresholds

The second one is economic nexus. Economic nexus became the most popular term since Wayfair decision back in June of 2018, where the Supreme Court ruled that physical presence is still valid. But on top of that, if a remote seller has enough sales, has enough economic activity into a state, whether it being the number of transactions or the total revenue into that state in a period of time, then that will also create nexus for that seller in that state. And that state can require that remote seller to collect and remit sales tax.

So throughout the past few years, all of the states have come out with nexus thresholds, because they do want to help small sellers that are not selling that much to not give them this burden. And it also applies to international sellers. If you are not a US resident, you are an ecommerce owner selling into the US market, then economic nexus is really what you need to worry about.

3:22

And I'm going to show you a great resource to guide you through, to see where you have economic nexus and how to evaluate that. So let me share my screen really quick.

Okay, on this one, this is a document that we have put together and it's called 10 Steps to Make Sure Sales Tax Doesn't Burn Down Your Business. And at the end of the document we put together all the states and their threshold for economic nexus.

So Alabama, for example, the threshold is 250K. So before you hit $250,000 of sales into Alabama, you do not need to register. You don't need to collect sales tax either. In Alaska, it's a $100K or 200 transactions. So here, if you sell over 200 transactions, then you need to register. If you sell over a $100K, you need to register. If you are below both thresholds, then you do not need to register.

4:23

Another one to notice is the states all have different thresholds. So California is $500,000 because it's a bigger state, so they are giving the sellers a higher threshold. Same with New York and Texas, where you'll see if you scroll down to the other states. Here in Connecticut, it's a hundred thousand dollars and 200 transactions. So you need to fulfill both requirements to be considered having economic nexus in Connecticut.

So what I recommend you guys to do is to download this document, and I'll link in the description on where to do that, and then download your sales order and sort it by United States states, and to see how much sales you have going into that state and how many transactions you have going into that state. Then compare your data with this document that we put together for you, to determine which states you have hit economic nexus in. So that's step two.

5:27 Marketplace nexus

The third type of nexus for international sellers is marketplace nexus. If you are a marketplace facilitator selling into the US and you have lots of US sellers on your platform, that might create nexus for you. And I have a video right here talking about what exactly creates nexus for marketplace facilitators.

But if you are a marketplace seller, meaning if you sell on Amazon, Etsy, Walmart, then these places are considered marketplace facilitators and they are already collecting and remitting sales tax for you, except in Missouri. But again, Missouri doesn't have that economic nexus law yet. So as long as you don't have people and property in Missouri, you're covered in Missouri.

So those are the three types of nexus. Just to summarize, physical presence, economic nexus, download the 10 step guide and follow the instructions. And the third is marketplace nexus.

6:23

But I just want to mention, if you have a combination of marketplace sales and your own website sales, still check to see if you have nexus, because your marketplace sales are taken care of, but your own website sales are still your responsibility. And when you are trying to do the economic nexus piece, you need to add both sales from all your sources together to see if you pass the threshold or not. So just to pay attention to that.

6:59 What to set up before you register

Okay, so the next thing I want to talk about is, after you determine which states you have nexus, here's also something else you need to do before you can go to the state's agency website, revenue agency website, and apply for a sales tax permit.

First, you need to apply for an EIN number, your employer identification number. And I have a video here in how to apply for that. It's a step by step guide in filling out form SS-4. So check out that video and it'll tell you exactly what you need to do.

After that, you need to pick a state to register your business with. We've seen lots of our business register with Wyoming or Delaware for income tax purposes, but it's totally up to you.

7:44

And then the third step and the fourth step really is to open a US bank account and have a US mailing address. And this can be a virtual mailing address. You just need someone here in the US that will scan mail for you and send it to you, because if you start registering with state agencies for sales tax license and permits, they will mail these things to you. They'll mail access code and other important documents like your filing frequency, the actual permit and license. So a US mailing address is crucial.

A US bank account is needed because there's a few states, very few states, that require a registration fee when you do a sales tax registration. And if you want to pay sales tax in the US, you need a US bank account, 'cause they always ask if the money's coming out of the US, and then there's just other steps that needs to be involved.

And I know it's not easy for international businesses that are not physically located in the US to open a US bank account. So we've done our research and we think Mercury online banking is the easiest way to go, that you can just open a bank account online, and they also have the virtual mail address service as well. So check out their website.

9:16 Three things not to do

Okay, so we talked about what creates nexus, what are the steps you need to do before you register with the state. Before we go, I just want to give you three advice on things that you should not do.

First of all, do not start collecting sales tax before you hit the nexus threshold. You don't have an obligation if you don't have nexus, but once you start collecting, those money need to go to the states. So we've seen clients that thought they should just turn everything on to protect themselves, but ended up having to file in all the states, even the states they do not have sales tax nexus in. So do not turn on tax settings to collect in the states where you haven't hit the economic nexus threshold, or where you don't have a physical presence. So that's pitfall number one.

10:11

Number two is, do not register everywhere. You need to do a nexus analysis, a nexus study, to see where you have nexus and then to see what your exposures are. Feel free to reach out to us if you want us to do that for you, but you do not need to. Most businesses do not need to register everywhere. So don't feel like you have to register in all the states in the US.

And the third one is don't register everywhere just for resale certificates. There are other ways to get resale certificates. I've done a video here in using the SST form and MTC form. On the SST form, if you are a foreign seller, you can put your passport number on there as well without any US identification number. So check out that video. Do not register everywhere just for a resale certificate.

11:05 Free guides and next steps

Okay, we've covered lots of information. Let me know in the comments if you have any questions about your nexus, about steps to do before you need to register for sales tax, and about the three things I said not to do.

And I want to give you guys a free guide on the five things you need to do before you apply for a sales tax license. So it's a checklist of everything I just talked about. So I'll link the description below, so feel free to go there and download the checklist. And then you can download the 10 steps as well to get the nexus charts for all the different states.

I hope that was helpful. If you found it valuable, please give it a like, subscribe to our channel, share it to your other ecommerce seller friends. And if you need our service, contact us. And if you are an accountant that would like to work with us, feel free to reach out to us as well. We're always looking for great talent to work here at LedgerGurus.

I'll see you guys in the next video. Hope you have a good day. Bye.