I want to start a US company as a non-US resident. Do I need to pay sales tax?
This is one of the most common questions international founders ask; we call it the ‘sales tax essential’ question.
At Neubase, we hear it in nearly every free consultation. To make things easier, this article gives you a clear overview of how sales tax works for non-US residents who set up companies in the United States. It will help you understand when sales tax applies, how it’s triggered, and what your responsibilities may be before you even get on a call with us.
Do US Companies Operated by Non-Residents From Abroad Pay Sales Tax?
The short answer is that most non-resident founders do not need to pay sales tax unless certain conditions are met. These conditions include:
- Storing products in a warehouse or fulfillment center located in the United States, or having personnel in the US
- Generating more than 100,000 dollars in revenue or completing at least 200 transactions in a particular state. You can see all the economic thresholds by state on this link.
It is also important to know that many states do not apply sales tax to services or software. In practice, this means that e-commerce businesses need to be especially careful once they begin to approach these thresholds.
If you do reach the point where sales tax collection becomes necessary, the process can feel complicated. Later in this article, we will outline practical solutions that make it much easier to manage.
What is Sales Tax?
Sales tax is a government-imposed tax on the sale of goods and services. It is added at the point of purchase and collected by the seller on behalf of the government.
In simple terms, sales tax is a consumption tax. When a consumer buys something, they pay tax on that purchase. In theory, every buyer could keep their receipts, calculate the tax due, and send the money directly to the government. But that is not realistic, and no government expects individuals to do that voluntarily.
Instead, the responsibility falls on businesses. Sellers must calculate the correct sales tax on the goods or services they sell, add it to the price, collect the tax from the buyer, and then remit it to the government.
If you are familiar with Europe’s Value Added Tax, or VAT, sales tax in the United States is essentially the American version of VAT, although the rules and rates vary by state rather than being standardized nationwide.
What is Taxed with Sales Tax?
Sales tax does not apply to everything. Each state decides what goods and services are taxable, and the rules can vary widely. Still, there are some general patterns that make it easier to understand.
Physical goods
Most states apply sales tax to the sale of physical goods. This includes items such as clothing, electronics, furniture, and household products. If you are selling tangible products that are delivered to customers in the United States, there is a good chance they will be subject to sales tax once you meet the threshold in that state.
Services
When it comes to services, the rules are not as strict. Many states do not tax services at all, while others tax only certain categories, such as telecommunications, repair services, or utilities. In short, services provided by non-residents provided from abroad are almost never taxed.
Software
Software is a special case. Some states treat software as a product if it is delivered in a physical form, like a CD or USB stick. Others apply sales tax even to digital downloads or cloud-based software. Many states, however, do not tax software at all, which is why SaaS businesses often have fewer sales tax obligations.
Food, medicine, and other
Food, medicine, and other essentials are often taxed at a reduced rate or completely exempt, but this also depends on the state.
In short, physical products are almost always taxable, while services and digital goods may or may not be, depending on local rules. This is why it is important to check the specific laws in each state where your business has customers.
Who Imposes the Sales Tax?
Sales tax is imposed by states, counties, and cities. There is no federal sales tax in the United States, which means the IRS is not involved in sales tax collection or enforcement.
If you sell to a customer in Miami, for example, you must collect and remit sales tax to both Miami-Dade County and the State of Florida, since both impose sales tax.
On the other hand, if your customer is in Portland, Oregon, you do not collect any sales tax at all. Neither the city nor the state imposes it.
Do Non-US Resident LLCs and C-Corps Collect Sales Tax?
Non-US resident companies have sales tax obligations only in the states where they establish a nexus. Nexus means a business connection with a state that creates a legal obligation to collect and remit sales tax.
There are two main types of nexus:
Physical nexus
You create physical nexus in a state when you have a physical presence there. This can mean having offices, employees, or storing inventory in warehouses or fulfillment centers. Each state defines physical nexus differently. For example, some states say that storing inventory with a third-party fulfillment provider creates nexus, while others do not. You always need to review the rules for each state carefully.
Economic nexus
You create an economic nexus in a state when your sales exceed the thresholds set by state law. In most states, this means more than 100,000 dollars in annual sales or more than 200 separate transactions with customers in that state. Some states set higher thresholds.
If you have a physical nexus in a state, you must collect sales tax from your very first sale there. If you do not have a physical nexus, you are only required to collect sales tax once you cross that state’s economic nexus threshold.
Example
Imagine you operate an ecommerce business incorporated in Wyoming. You store your inventory in Tennessee and you have no employees in the United States. Your sales are:
- 200,000 dollars in California
- 150,000 dollars in Texas
- 200,000 dollars in Florida
- 22,000 dollars in North Carolina
Here is how Nexus applies:
- Incorporation in Wyoming does not create sales tax obligations there. What matters is where your business has activity, not where it is registered.
- Inventory stored in Tennessee creates a physical nexus. You must collect sales tax on all sales to customers located in Tennessee.
- California sales of 200,000 dollars are below the 500,000 dollar threshold, so no economic nexus there.
- Texas sales of 150,000 dollars are also below the 500,000 dollar threshold, so no economic nexus there.
- Florida sales of 200,000 dollars exceed the 100,000 dollar threshold. You must register for sales tax in Florida and collect it from Florida customers.
- North Carolina sales of 22,000 dollars are below the 100,000 dollar threshold and, assuming fewer than 200 transactions, there is no nexus there.
In this scenario, your business has sales tax obligations only in Tennessee and Florida. You must register and collect sales tax in those two states only. There is no obligation to collect sales tax from customers in California, Texas, North Carolina, or any other state where you have not reached nexus.
Do Companies Registered in Wyoming and Delaware Pay Sales Tax?
The state where you incorporate your company does not determine whether you must pay sales tax. What matters is where your business activities take place, what you are selling, and where your customers are located.
In other words, you are required to pay sales tax only in the states where you have nexus.
Simply registering your company in Wyoming, Delaware, or any other state does not create a nexus on its own. To have sales tax obligations in a state, you must either maintain a physical presence there or exceed that state’s economic nexus thresholds through your sales.
How Does Sales Tax Work?
The easiest way to understand sales tax is through an example.
A customer wants to buy a product priced at 100 dollars. In the state where the customer lives, the state sales tax rate is 4 percent, and the city adds another 2 percent.
The seller calculates the tax like this:
- 4 percent state tax equals 4 dollars
- 2 percent city tax equals 2 dollars
The seller adds these amounts to the original 100-dollar price, so the customer pays a total of 106 dollars.
Out of this amount, the seller keeps 100 dollars. They must then report and remit 4 dollars to the state and 2 dollars to the city.
If the seller failed to add the sales tax on top of the original price, and an audit took place, the seller would be required to pay the 6 dollars in tax out of their own 100 dollar revenue.
Why Sales Tax is Complicated and How to Handle It
Sales tax is notoriously difficult to manage. The most astounding fact is that there are more than 13,000 different tax rates in the United States when you combine state and local levels. To stay compliant, you need to track all of them, calculate the right amount for each transaction, and file reports correctly.
Yes, this is extremely challenging. Fortunately, there are tools and services that can make it manageable.
Numeral
Offers a simple way to track sales tax. It provides a free tracker and only begins charging once you actually have reporting obligations. They automate tax collection, remittance, filing, and reporting. This makes it cost-effective for startups or small businesses that are just getting started.
Kintsugi
Kintsugi works in a similar way. You can use it to monitor your sales tax exposure for free and you only start paying once you need to file reports. By that time, your business will already have the revenue to cover the cost.
TaxJar
One of the most popular tools for sales tax management. It automatically calculates tax for each transaction, provides detailed reporting, and can file sales tax returns in many states on your behalf.
Stripe
Stripe can calculate and collect sales tax at checkout, but it does not automate the filing of returns. You will still need to use another tool or file manually to stay compliant.
Merchant of Record (MoR)
A Merchant of Record is a third party that takes full responsibility for handling payments and sales tax compliance. Instead of your company charging customers directly, the MoR acts as the legal seller, collects payments, calculates and remits sales tax, and deals with any audits. This is a strong solution for businesses that want to avoid dealing with sales tax complexity altogether.
Popular MoR providers include Paddle and FastSpring, both of which are widely used by SaaS companies selling internationally.
Keep in mind that Merchant of Record companies work mostly with software businesses or with digital products. They do not work with service companies or businesses selling physical products.
Final Thoughts
Sales tax in the United States can feel overwhelming, especially for non-US resident company owners. With thousands of tax rates and different rules across states, compliance is not simple. The good news is that you are only responsible where you have nexus, and there are tools and services available to make the process easier.
The more you know the basics of when sales tax applies and using the right solutions, the more you can stay compliant without losing focus on growing your business.
For more tailored guidance, feel free to reach out and schedule a free consultation with us.
