The following is more of a guide than a step-by-step about taxes within the USA. We suggest that you seek independent advice on your specific tax implications to avoid any potential fines or fees.
Background on US Sales Taxes
The USA has 50 states and one federal district and as many different rules and regulations on taxable transactions. These Sales Taxes range from 0% to over 11% depending upon the individual state rules and on the products or services being purchased. The lack of consistency across state lines has led to a lot of confusion on what should be taxed and how much even with US based retailers. Adding to the confusion is the US Supreme Court case South Dakota vs. Wayfair Inc (June 2018) where it was ruled that a physical presence within a state was no longer a prerequisite for adding sales tax. This, therefore, opened the door to other states to tax transactions based upon a company’s ‘economic nexus’ e.g. their Sales or Orders within a state up to a specific amount as set by each state. Most of these have taken on the transaction and order amounts as set by South Dakota. More on this below.
What Defines a “Nexus”?
The term nexus is from the Latin term nectere meaning to tie, bind or join. It was previously only afforded to retailers who had a physical connection with a state; thus they were, and continue to be liable for sales taxes. This includes any warehousing, employees, affiliates and even attendance of trade shows or events that a retailer may have in the USA. Note that if you use Amazon’s FBA or a 3rd-party fulfilment this is considered a “physical nexus” with the state within which it’s located. If you have a physical nexus within the US then you must apply state taxes where that nexus exists to your customers. Following the South Dakota vs. Wayfair case, this has been expanded out to an economic nexus which means that if a retailer hits the state mandated sales or order limit within a defined period then they need to add sales tax.
In South Dakota for example this is $100,000 or 200 orders. There is also, as with New York, a “click through nexus,” mainly centred around affiliates. For example, if you have an affiliate based in New York who allows customers to click through to your website in exchange for a percentage cut of the sale you need to add sales tax. This is commonly referred to as the ‘Amazon Law’ as it was intended to circumvent previous legislation in order to get a cut of Amazon’s sales.
Do I Need to Charge US Sales Taxes as a UK company?
In a word, no. Unless you have a nexus within the US; whether that’s physical, economic or click-through. If you do sell any products or services to customers based in the USA it is definitely worthwhile noting their location and the amount of sales you’ve had within that state(s). You can then update the financial or order amount of each state and cross-reference your sales/transactions to check if you need to start adding sales tax or not. We would, again, at this point suggest contacting a professional to double check tax implications for cases on the periphery of the nexus-oriented rules, and also to keep you up to date with the latest developments and responsibilities.
Is VAT chargeable?
Most exports from the UK to the USA can be zero-rated for VAT (i.e. no VAT is chargeable). However, you must keep documented proof of the export in case of audits or checks from HMRC. Some services for US based clients or services being undertaken in the USA are VAT-able; such as those involving physical performance: speaking at events, performing arts, etc.
How do I add Sales Tax?
If you need to add Sales Tax rules to your Stor Shop, you can do this through:
- Firstly select what country your business is based in
- Click the Checkbox for any geographies you need to charge tax in
- Add any Relevant information in the opened form e.g.
- VAT Number
- Whether Prices are Excluding or Including Tax
- If Delivery Charges are Excluding or Including Tax
NB: US and EU Taxes are calculated automatically but it is up to you as the merchant to ensure it's all correct for each scenario.
Tax is as ever an intricate and complicated process and is made harder with the USA’s multitude of legislative entities. However, these resources may assist you in making the setup slightly easier.