Small Businesses Owners
Sales and use tax are taxes imposed on tangible personal property (TPP) and in some instances, taxable services. The tax rates vary from state to state and can also include local jurisdictions such as cities, counties and districts. Although this concept is simple enough to understand, each state differs in defining what a taxable good or service is. This can become further complicated by nexus establishment and understanding sales tax sourcing. Sellers that collect sales tax must file sales tax returns to the state and possible jurisdictions where sales tax was collected. The filing frequency of the sales tax returns can vary from monthly, quarterly, semi-annually or annually. Collecting sales tax is an important step, but registering your business in the appropriate states is just as important as well. The lack of understanding sales tax code for a state where obligation is established can lead well-meaning businesses and individuals with large tax assessments from audits.
Unfortunately, many international businesses are under the assumption that since they do not have permanent establishment (PE) for federal income tax purposes, they do not have a responsibility to collect sales tax. That assumption could not be further from the truth. In general, states do not recognize United States (US) Federal Income Tax treaties because they are not “party to” bi-lateral agreements. However, many of the activities that do not create a PE do create nexus for sales tax purposes. States are not concerned whether a company is foreign or not. They are concerned with a business’ nexus establishment and if sales tax would need to be collected and remitted. When a business creates a sufficient presence in a state, nexus is created and sales tax laws for that state must be taken into consideration. Each state varies in what constitutes nexus establishment, but generally having an office, inventory or employees in a state usually establishes nexus.
How does an international business comply?
Experts in the field help businesses understand and comply with complex sales tax laws. Additionally, understanding nexus and how the states in question define nexus will help in determining if nexus is established. Acquiring a federal identification number and registering for sales tax collection may be additional steps needed to take if nexus is established in any particular state. Once a business is registered, the state will issue an identification/registration number and a filing frequency for sales tax.
Amazon FBA Seller
Small and medium-sized businesses are faced with several new challenges when making the business decision to sell their products through the Amazon FBA program. One of those challenges is the need to comply with tax laws in multiple states. The primary state tax obligation will be the need to collect sales tax from sales in states where your inventory is stored.
Amazon Collects But Does Not Remit the Sales Tax!
Amazon FBA will give you the tools to collect sales tax, but Amazon WILL NOT remit the tax to the states for you. Inventory may also create nexus for income tax purposes; companies should carefully analyze this factor. Unlike sales tax, which is a cost to comply obligation for your company, income tax could create an additional state income tax liability. Finally, many states have a personal property tax on inventory stored in their state. This will be both compliance and an additional cost to doing business under the Amazon FBA program.