Indirect tax compliance in the U.S. can be complex for foreign businesses. Beyond income taxes, businesses may face sales and use tax, property tax, franchise taxes, annual report filings, and other taxes on a state and local level, given that each state has its own rules and regulations. This article provides a detailed guide on various types of indirect taxes and what to consider to help maintain compliance.
Sales & Use Tax
Sales tax is a common form of state tax in the U.S., which is similar to the value-added tax (VAT) seen in many countries outside of the United States.
- Sales tax rules vary significantly across different states. Sales tax is a consumption tax imposed on end consumers on the sale of goods and services. It is generally based on a percentage of the purchase price and added to the final cost of goods and services.
- Sales tax in the U.S. will only be collected. There is no such thing as sales tax deductible, like with the VAT.
- In the U.S., when a vendor charges sales tax to the customer, the customer records it as an expense. The sales tax is added to the cost of the item purchased.
- Use tax is a complementary or compensating tax to the sales tax and does not apply if sales tax was charged. Purchases made outside the taxing jurisdiction but used within the state are charged use tax. Use tax also applies to items purchased exempt from tax, which are subsequently used in a taxable manner.
Foreign businesses must understand the specific requirements of each state and locality in which they operate. Compliance involves several key steps, such as:
- Eligibility: To be eligible to collect and remit sales tax, it’s important to determine if the product or service the business offers is subject to sales tax. Each state or locality has different rules, depending on factors including point of sale, type of product, and more. There are also exemptions for resale, which typically come into play if the seller is a wholesaler or distributor, in which case the seller would need to collect and maintain resale exemption certificates.
- Nexus: According to Bloomberg Tax, nexus is the requisite contact between a taxpayer and a state before the state has jurisdiction to tax.1 Sales tax nexus “is generally established when a business’s retail activity in a state meets a certain dollar amount and/or number of individual transactions.” The U.S. Supreme Court decision (South Dakota v. Wayfair) in June 2018 reshaped how nexus is defined and enforced, making it essential for businesses to understand their obligations in each state. Under Wayfair, the prior rule of physical nexus was overturned and replaced by economic nexus. The Wayfair ruling, as the case is commonly referred to, subjects entities with or without a physical presence in a state to sales tax if they have a certain number of transactions or sales activity. The general rule in most states is more than 200 transactions and/or $100,000 of in-state sales. However, some states do have different thresholds. As of January 2024, all states imposing a sales tax have adopted some form of economic nexus for sales tax.2 Essentially, there are three ways that states have drafted the regulations:
- Sales threshold
- Sales or transaction threshold
- Sales and transaction threshold
- Registration: The business must register for a sales tax permit or license in each state where it has a taxable presence. This process involves providing information about the business and its activities. Registration is necessary to start collecting sales tax.
- Collection: Once registered, businesses are required to collect sales tax from customers on taxable transactions. The rate of sales tax varies depending on the state and locality.
- Remittance: Collected sales tax must be remitted to the appropriate state. This involves filing regular sales tax returns and making payments by the due dates specified by each state. The filing frequency may be monthly, quarterly, or annual, depending on the volume and regulations of each state. The frequency of filing requirements can also change with the volume of sales.
- Use Tax: In addition to sales tax, states may impose use taxes on goods purchased out of state but used within the state. Businesses must report and pay use tax on such transactions.
Leveraging technology can help streamline sales tax compliance. It’s important to select accounting software that can automate rate calculations while invoicing and have the capability to facilitate tax calculations for multiple jurisdictions if needed. There are also various software programs that can integrate with cloud-based accounting software, facilitate filing of sales tax returns, and aid in record-keeping. While these software applications can be helpful for compliance, it’s critical that they are set up correctly by knowledgeable professionals to help avoid complications and errors in filings.
Business Property Tax
Business personal property tax is assessed on tangible personal property used as part of a company’s operations, such as furniture, office equipment, machinery, and livestock.3
Foreign businesses must assess the value of their property and pay taxes based on local rates, if required, in the states in which they operate. Property tax compliance requires understanding the assessment process, filing necessary documentation, and making timely payments. Businesses should also be aware of any exemptions or abatements that may apply to their property.
Franchise Tax
Franchise tax is imposed on businesses for the privilege of operating within a state. The tax is typically based on the business’s net worth or capital stock or has a flat fee charged annually. Compliance involves calculating the tax owed, filing annual reports, and making payments. For instance (but not limited to):
- Delaware requires an annual franchise tax for all companies incorporated in the state, due March 1 for corporations and June 1 for limited liability companies and partnerships.
- Texas requires an annual public information report filing for all businesses registered to do business in Texas by May 15.
- New Jersey requires all businesses registered in the state to file an annual report by the last day of the month in which the business was formed.
The requirements vary by state and thus make it important to seek professional advice to help ensure compliance and avoid penalties.
How Forvis Mazars Can Help
Navigating indirect tax compliance in the U.S. can be challenging for foreign businesses. Understanding sales tax, property tax, and franchise tax requirements is crucial for maintaining compliance and avoiding penalties. Seeking professional advice and staying informed about changes in tax laws can help you meet your obligations. If you have questions or need assistance, please reach out to a professional at Forvis Mazars today.
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