Selling to the US?

Learn how US states are extending their

sales tax net to foreign businesses, and
how to get compliant and stay focused
on your US expansion plans
 Contents

1 Why foreign businesses need to worry about

sales tax
Page 3

2 2020: States are rushing to tax remote

sellers
Page 4

3 US taxes explained: know your nexus from

your sales tax and consumer use tax
Page 5

4 Six differences between sales tax and VAT Page 7

5 Checklist: how to get sales tax compliant Page 9

6 Avoiding common sales tax mistakes Page 11

7 Streamlined Sales Tax: low-cost compliance

for your multi-state filings?
Page 13
Why foreign businesses need
to worry about sales tax

An increasing number of foreign (‘remote’) businesses How will this guide help you
that are currently selling in the US are now beginning
understand and plan for
to worry about sales tax.
sales tax?
Following the 2018 South Dakota vs Wayfair Inc
Supreme Court ruling, almost all states have brought To help you tackle your potential
remote sellers into the sales tax net. States are obligations and tax audit risks, we
expecting any business, over low annual sales have put together this guide with
thresholds to register with them, correctly track and some of the core concepts, rules
calculate the fiendishly complex rates, and then report and responsibilities for remote
and remit taxes. The potential cost of getting this businesses selling to US businesses
wrong is major: and consumers.

• Audits are a major distraction;
• Owed taxes, penalties and interest can go back
several years;
• Tax exposure could affect the value of your
business; and
• Failure to comply is a criminal offence.
Whether you are just starting out
in the US, already active in a few
states, looking to calculate or
retroactively report any back taxes,
this guide will support you.

The guide will cover:

• How the Wayfair ruling has opened the flood gates to
taxing remote sellers;
• An explanation of US sales tax, including the basics of how
it works;
• Sales tax vs VAT, and how the US tax differs from turnover
taxes in the rest of the world;
• Common sales tax mistakes and how to avoid them;
• Avalara’s six-step checklist to get sales tax compliant;
• How streamlined sales tax can make multi-state taxes
easier and cheaper.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

3
2020: States are rushing WASHINGTON

OREGON
IDAHO
MONTANA
NORTH
DAKOTA

SOUTH
DAKOTA
MINNESOTA

WISCONSIN

MICHIGAN
VERMONT

NEW YORK
NEW
MAINE

HAMPSHIRE
MASSACHUSETTS

CONNECTICUT

to tax remote sellers

PENNSYLVANIA
WYOMING NEW JERSEY
IOWA DELAWARE
OHIO
NEBRASKA INDIANA WEST WASHINGTON
VIRGINA
NEVADA ILLINOIS
UTAH VIRGINA

COLORADO MISSOURI
KANSAS
KENTUCKY NORTH
CALIFORNIA CAROLINA

TENNESSEE
SOUTH
OKLAHOMA ARKANSAS CAROLINA
NEW
MEXICO MISSISSIPPI GEORGIA
ARIZONA ALABAMA

TEXAS
LOUISIANA
FLORIDA

Two years on from the landmark Wayfair tax ruling

The June 2018 South Dakota vs Wayfair Inc. US Supreme Court ruling opened the option for US states
to tax remote sellers for the first time.

The case upended the test of whether a remote business was responsible for sales tax from ‘physical
nexus’ and added the concept of ‘economic nexus’. This change means selling to a state’s businesses
or consumers, without local staff, stock or premises, now triggers the obligation to register with the
state and other tax jurisdictions. The concept of physical nexus did not get replaced – i.e. storefronts,
remote sales reps and tradeshow attendance can still trigger a registration requirement – but
economic nexus was simply added to the list of criteria.

Since 2018, the majority of states have updated their sales tax obligations on remote sellers, and co-
opted marketplaces as tax collectors, too.

States impose economic nexus on Marketplaces now obliged to collect

remote sellers
• Jun 2018: 3 states obliged remote
businesses to collect sales tax
• Sep 2019: 35 states have introduced
economic nexus test on remote businesses
• Dec 2019: 43 states oblige remote
businesses to charge sales tax
remote sellers’ tax
• Jun 2018: 7 states obliged marketplaces to
collect taxes on behalf of their sellers
• Sep 2019: 15 states had imposed the
responsibility onto marketplaces to act as
the sellers’ tax collections agent
• Jan 2020: 34 states have implemented
marketplace tax obligations for their sellers

What’s coming in 2020? More taxes on digital services

Many of the reforms bringing remote businesses into the sales tax net are in place for 2020. This
excludes the District of Columbia (DC), which while not technically a state, administers sales tax
as states do. Only two of the 45 states with a sales tax regime have yet to put forward amending
legislation.

Into 2020, the focus will move onto extending the range of taxable transactions. In particular, digital
or electronic services. These are all subject to VAT in Europe and much of the rest of the world. But US
states have limited, and very inconsistent, services liabilities to sales tax. Key electronic services that
may catch the attention of legislators include:

• Streaming and download media

• Apps and games
• E-learning
• E-books and digital publications
• Membership to online clubs
• Software-as-a-Service (SaaS)

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

4
Know your nexus from your
sales tax and consumer use tax

For remote businesses selling into the US, there is a whole new ecosystem of tax principles and
terminology to learn which will have only limited resemblances to the VAT or GST you will be familiar
with. These include: whether to tax in a particular state, city or county (‘nexus’); sales tax; consumer
use tax; and seller use tax.

You will need to understand and follow all of these issues to avoid nasty tax audits, upset customers
who have been charged tax incorrectly or fines. Here are the highlights of what you need to
understand.

Nexus – where to tax and the Wayfair revolution

Nexus is the US sales tax term for the rules determining where a transaction
should be taxed, and if a remote seller should register and collect taxes. It
is similar to the European ‘place-of-supply’ concept for confirming in which
country VAT should be charged on a cross-border transaction.

Until the Wayfair Supreme Court ruling in June 2018, having nexus, and
an obligation to register and pay tax, was only established by having a
substantial presence – ‘physical nexus’. This was interpreted as having staff or
premises; but in some states a short-term sales field trip could trigger nexus.

The Wayfair ruling overturned this. It extended the obligation to tax remote
sellers with local transactions – termed ‘economic nexus’. Almost all US states
have this new rule implemented by the end of 2019, meaning foreign sellers are
now responsible for the tax.

Most states have introduced a threshold, one of the key influences in the
Wayfair ruling. Typically, this is for $100,000 to $200,000 sales per annum in the
applicable state, or more than 200 transactions.

Taxability – how much to tax

The most complex area of US sales tax - taxability is the term that covers the
concepts behind if and by how much a particular product or service is taxed
in the 12,000+ states, counties and local jurisdictions. It includes:

• The sales tax rate of the product in the location of the customer;
• If the product is taxed fully, partially or not at all by the jurisdiction;
• If there are any sales tax holidays; and
• If the customer has sales tax exemption status.

The variations in rates, and therefore taxability, between the states and tax
jurisdictions are enormous.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

5
Sales tax – turnover tax levied by states and local jurisdictions
Sales tax is a turnover tax on goods and services, administered by businesses
who are liable for any uncollected taxes. It is levied by 45 states, plus DC.
However, more than 12,000 states, counties, cities and other special jurisdictions
have the right to tax in their locale.

Where liable, the seller must collect the taxes, hold on trust and remit with
a regular return to the appropriate juristicition. Failure to follow the states’
requirements is a criminal offence. Fortunately for remote sellers, the states will
generally collect taxes from them to distribute to the plethora of jurisdictions
in their area.

Consumer use tax – taxing the missed sales

Where sales tax is not collected on a taxable sale, consumer use tax
probably applies instead to ensure all state fiscal revenue is captured. The
consumer use tax rates are generally the same as sales tax – although some
states have some minor variances.

There are two common cases where consumer use tax applies:

1. Where a remote business did not tax a transaction. This could be because
they are selling below the state registration threshold. States require
their consumers to self-report their non-taxed transactions and pay the
applicable tax. Around a dozen states require the business to comply
with use tax notice and reporting requirements.

2. When in-state businesses use their own stocks, which were originally
purchased tax free, for resale. Again, the business must self-assess, report
and pay the tax to their state.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

6
Six differences between
sales tax and VAT

What’s the same?

US sales tax and VAT are taxes on the final consumer, collected by businesses on behalf of the
government.

In both cases, if you are selling to local consumers as a foreign supplier, you will likely have to register
as a non-resident or ‘remote’ taxpayer. There has been a coming together recently between sales tax
and VAT on the rules on determining if tax applies based on where the seller is located, ‘nexus’ in US
terminology. Once registered for sales tax or VAT, you will have to:

• Accurately calculate and charge the tax ;

• Submit regular returns, summarising sales and taxes due; and
• Remit any tax payable to the appropriate tax authorities.

But that’s where the similarities end. Both VAT and sales tax are complex; but for different reasons.
Here are six major differences.

1. Sales tax is state level, plus
thousands of local jurisdictions; VAT
is only levied at the country level.
Sales tax is set by the US states – 45 of the 50
US states, plus DC, have a sales tax. However,
and this is where sales tax gets very cluttered.
Counties, cities and a number of other special
jurisdictions (in excess of 12,000) have the
right to set and charge tax on the transaction
on top of the state sales tax.
This makes the determination of the right
sales tax rate a huge challenge as the
business must determine exactly which
jurisdictions’ taxes apply, and how to combine
them. VAT is controlled and levied at the
federal government only.
2. Huge diversity of sales tax rates,
with frequent changes; Only three or
fewer VAT rates.
As there are thousands of US sales tax
jurisdictions which often, confusingly, overlap
each other, there is a huge combination of
rates.
This is compounded by the states, counties and
cities making no attempt to harmonise the
rates they charge on the same products. Lastly,
US states and tax juristictions like to tweak
their sales tax rates frequently - often monthly
in states like Alabama.
This makes calculation even more complicated
given the likelihood that rates have changed.
VAT rates are simple to track - pretty much
every country as has a single, standard rate for
most goods and services.

There are then typically two reduced rates on

basic foodstuffs and public services. These tend
not to change from year-to-year.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

7
3. Sales tax only on final consumer;
VAT is collected on all transactions.
This is where sales tax is ‘simple’. It is only
charged on the final consumer (at the till or
online checkout).
A business or other exempt entity may provide
its official ‘exemption certificate’ to a seller to
adjust this to zero. VAT is far more complex. It
is charged throughout the supply chain from
the first sale down to the final purchase by the
consumer, so B2B as well as B2C sales.
Businesses have the right to deduct the VAT
they have been charged against the VAT they
then levy on their own customers. This is done
via the regular VAT return and VAT’s factional
collections process helps cut fraud.
4. VAT is collected by the business;
sales tax could be the marketplace’s
obligation too.
The seller of goods or services is responsible for
VAT calculation and collections even when sold
via an online marketplace platform. In the US,
most states now impose a sales tax collection
obligation on the marketplaces for their remote
sellers.
The marketplace obligation rules vary between
the states on whether the platform must collect
the tax, which adds to the complexity of getting
taxes right.
It is important for the seller to track when a
marketplace has withheld the sales tax to
avoid double tax reporting and losses.

It does however make VAT complex, especially

on international sales where it is not always
clear which country’s VAT rules and rates
apply to the sale.
5. VAT is due on digital services; but
may be exempt from sales tax.
In Europe, and increasingly throughout the
rest of the world, VAT is levied on digital or
e-services. These include:

• Streaming or download media

• Apps; e-books and publications
• Advertising; membership to online clubs
• Most e-learning; SaaS software; and data
storage

The US sales tax regime is further behind

on these new offerings. States are only just
beginning to charge sales tax on ‘digital goods’,
as they are known. Again, rates and rules vary
enormously between the different sales tax
jurisdictions.

6. US consumer use tax is not to be forgotten

In the US, to capture missing taxes not collected by remote sellers, or where businesses consume their
own tax-free stocks, states created consumer use tax.

Any consumer not charged sales tax by a remote business must report and pay to their state or tax
jurisdiction the sales tax.

The same for the businesses using their own stock which they had bought tax-free for resale. VAT has
no similar requirement on consumers. There are self-supply VAT reporting rules, but there is no tax
cash payment due.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

8
Checklist to get sales
tax compliant

What’s the same?

If you are selling from abroad to US businesses or consumers, then most of the states will expect you
to be charging sales tax following the 2018 Wayfair Supreme Court ruling. There are many questions to
get distracted over, including:

• Am I over the registration threshold?

• How do I treat past sales and any tax liabilities?
• How do I get rate calculations correct?
• How do I submit tax returns correctly?

Below is a checklist of the key issues, and how Avalara can help you keep on top of them and stay
focused on growing your business.

Issues Points How Avalara can help

Should you register? The ‘nexus’ rules for A Nexus Study will review your
determining if you have to be footprint and offerings in each state
registered vary from state- to determine if you should be tax
to-state. They are expanding registered.
fast following the 2018
Wayfair ruling. States are
additionally extending tax
nets to traditional and digital
services.

What about back Once it is clear you should be
taxes? registered, how much tax is
due from prior sales? This may
include interest and penalties.
What is the best route to
disclose and pay any historic
taxes outstanding?
A Tax Exposure Analysis estimates
tax due on prior sales, and what
fines may be due. We will look to
mitigate any liabilities by identifying
exempt transactions. We will also
suggest the best way to settle the
bill to minimise total costs.
Our Voluntary Compliance Service
includes registering for tax and
choosing the optimum disclosure
path based on the various options
by state.

How to get sales tax If there are no back taxes,
registered then the appropriate
Department of Revenue or
Taxation, or other similar
taxing authority still needs
to be approached, and an
application filed to register.
Our Registration Service includes
gathering and checking all the
data and supporting documents to
support applications in any state.
Once we complete the application
and submit, we see it through to
getting fully registered.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

9
Issues Points
What about back Once registered, many states
filings? will require the submission
of returns covering old
transactions.
How to get the live Taxability - understanding
tax calculation right the rates, rules and taxing
boundaries - is the most
complex area of sales tax. It’s
annoying for your customers
and potentially costly for you
if the tax authorities spot you
have got it wrong.
How to file returns Keeping on top of all the
and settle due taxes filing deadlines and forms.
Plus, managing multiple tax
payments to different states
and local jurisdictions.
To learn more, call us on +44 (0) 1273 022400 or visit avalara.com
How Avalara can help
Backfiling involves Avalara helping
to determine the various returns
required, and completing them in
conjunction with your accounts
team.
AvaTax delivers cloud-based, real-
time rates and calculations into your
invoice system or shopping cart. And
with integrations into over 700 ERP
and e-commerce systems, it is easy
to plug and play.
Returns is a cloud-based returns
preparation software solution. Using
your data from AvaTax and other
sources, it prepares returns with a
higher degree of accuracy than doing
it yourself.
It manages the complex filings
deadlines to help ensure nothing is
missed. It also consolidates multiple
tax payments into a single transfer
which it can make on your behalf.
10
 Avoiding common sales
tax mistakes

Foreign (‘remote’) businesses selling goods to US businesses or customers are having to learn the rules
of sales tax quickly as states rollout their new legislation following the 2018 Wayfair Supreme Court
ruling.

It’s all too easy to assume it is simply a matter of just following the rules of VAT: one % rate x sales
price, followed by adding-up the total at month-end for the return. But it is the complex details of
sales tax which can undo your remote business, and leave you open to heavy fines or disappointed
customers.

Below are the most common mistakes remote businesses make when it comes to sales tax, and how
Avalara can help you to avoid them.

Mistake Challenge How Avalara can help

1 Getting the rates and

boundaries wrong
There are over 12,000 tax
jurisdictions in the US –
including states, counties
and cities - and rates change
frequently.
Use an automated rate tracker
solution such as Avalara’s AvaTax.
This will help get the precise rate
for each customer and reduce audit
risks.

2 Mismatches of the
rates with your
Ensuring you understand
which of the thousands of
Avalara can help tie your goods or
services to our automated product
products rates apply to your products – tax codes. This means your US
taxability– is a perplexing and taxability rules are always up-to-
distracting quagmire. date, mitigating any potential fines.

3 Ignoring
rules
the nexus Following the Wayfair ruling,
the states are rewriting their
Our Nexus Study service can provide
an in-depth analysis of your state-
nexus rules, and registration by-state obligations. It can also
thresholds, at a blistering provide up-to-date thresholds so
pace. With states inconsistent you can be alert to when it’s time to
in their design, it is becoming register in the next state.
a major bureaucratic
headache.

4 Mistakes on form
filing and missed
payments
Making misdeclarations on
the myriad of forms is a red-
flag to the tax authorities
– a trigger for an audit. As
are tracking the different
payment dates and multiple
cash transfer routines.
Avalara’s Return service automates
away the worries of filing and
getting the tax declared properly.
We can also help consolidate as
single payment for you to pay all the
different states’ taxes you owe.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

11
 Mistake Challenge
5 Missing or invalid
exemptions
A frequent cause of fines. A
peculiarity of sales tax is that
some business, distributors
or other entities can present
you with an exemption
certification – meaning
you don’t charge them tax.
However, not tracking this
properly makes you liable for
any missing tax.
6 Forgetting
use tax
consumer Another of the most common
causes of unpaid taxes
identified in audits. Whilst you
may be focused on sales tax,
you are also on the hook for
consumer use tax.
7 Not challenging tax
audits
Tax authorities typically make
estimated assessments of tax
due, with interest and short
payment deadlines. Often this
has little resemblance to your
actual transactions.
To learn more, call us on +44 (0) 1273 022400 or visit avalara.com
How Avalara can help
If you have a limited number of
exempt customers, you can keep a
track of their exemption certificates
within AvaTax. But, if it starts
growing, then consider Avalara’s
CertCapture add-in to automate the
capture, validation and maintenance
of up-to-date certificates for the
different tax jurisdictions.
AvaTax, our sales tax calculation
software will automatically spot
missed or miscalculated consumer
use tax. This includes completing
self-assessments on withdrawals
from your own stocks.
Avalara can easily pull supporting
transactions and exemption
certificates for you to help ensure you
are able to support audit appeals.
We can also point you towards the
local guidance for quick appeals.
12
Streamlined Sales Tax – low-cost
compliance for multi-state filings

If you are a foreign ‘remote’ business selling across multiple US states, the prospect of tracking lots
states’ rules on what is taxable, and differing returns and due dates, will look wildly daunting. With
the 2018 Wayfair Supreme Court decision to allow states to tax all remote sellers, the proliferation of
obligations and reporting to thousands of tax jurisdictions may make you question the commercial
sense of US expansion.

Support is at hand with the Streamlined Sales Tax (SST) simplified filing regime. Avalara is one of only
a handful of Certified Service Providers (CSP) for SST, and can get you onboard in quick time, with a
much-reduced compliance workload and cost.

What is SST? Which states?

Back in 2000, states started to co-operate 24 states now operate under the SST
on reducing the effort and cost of sales and agreement.
use tax compliance. They have since adopted
uniform sourcing rules, taxability definitions Other states are emulating it without fully
and local tax bases. signing-up, e.g. Pennsylvania. Virginia has
also codified into its law that it will implement
This is all co-ordinated by the state, so similar simplifications.
remote businesses don’t have to deal with
the thousands of tax jurisdictions. SST states
also provides a simple online registration
portal, easy exemption reporting, filings and
remittances.

Avalara – an acknowledged CSP, provides

low-cost SST service
The SST participating states subsidies the services of
a limited number of vetted, Certified Service Providers
(CSP). This can include a completely free service for
‘volunteer sellers’.

As your CSP provider, Avalara can provide an ultra-

low-cost filing service across the majority of sales
tax states for you. This provides you with a speedy
and affordable solution to lift the tax headache from
your multi-state sales plans.

To learn more, call us on +44 (0) 1273 022400 or visit avalara.com

13
ABOUT AVALARA

Meeting your global tax needs

Avalara helps businesses of all sizes get tax compliance right.

In partnership with leading ERP, accounting, ecommerce,

and other financial management system providers, Avalara
delivers cloud-based compliance solutions for various
transaction taxes, including sales and use, VAT, GST, excise,
communications, lodging, and other indirect tax types.

Headquartered in Seattle, Avalara has offices across the U.S.

and around the world in Canada, the U.K., Belgium, Brazil,
and India.

More information at:

www.avalara.com/europe
emeasales@avalara.com
or call us on:+44 (0)1273 022400

Want to know how global tax

reforms will impact your business?

INSPIRE
2020 summit
Register now: avalarainspire.com
avalara.com/europe

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