Key Pitfalls on Sales Taxes Imposed in the United States

Most of us have heard of sales taxes in the past with at least a vague idea of what it is: taxes imposed on sales. Although the concept may initially seem straightforward, the details behind when and where sales taxes are imposed in the United States can become unnecessarily complex without the appropriate resources. In addition, the concept of sales tax itself may be foreign to those who reside out of the US. Let’s spend some time covering the key concepts of sales taxes attributable to the US.

Sales tax is a form of consumption tax that is generally imposed on the final retail sales of goods to the end user. Instead of collecting sales taxes from the end user themselves, the sellers register with the appropriate jurisdictions and remit the sales tax.

In the United States, sales taxes are imposed at the state and local level, instead of at the federal level. In other words, there is no such thing as federal sales tax. This means that depending on which state the sales transaction occurs, the tax rates may drastically vary. In addition, sales taxes imposed at the local level, in addition to the state level, can further add a layer of complexity.

Identifying in which state and municipality must the seller register and pay sales taxes, can also be extremely complex. In general, how a sales transaction is taxed depends on where the transaction is “sourced”, or where typically the seller has a physical presence at, also known as having a “nexus” with the jurisdiction. In addition to this, certain states require sellers without physical presence to register and collect sales taxes. Due to a US Supreme Court decision in 2018, now various states require sellers to collect sales taxes based on certain volume of sales made in the respective states.

The following are a few examples of key pitfalls and considerations to be made relating to sales tax:

  • Properly categorizing which transactions are taxable and non-taxable for sales taxes.
  • Identifying and properly registering in the appropriate states and jurisdictions requiring sales tax collections.
  • Managing exemptions and exclusions.
  • Managing data to determine various caps, thresholds, and registration requirements (i.e. sales volume at each state to determine presence of “economic nexus”)

In summary, it is imperative for Companies to properly address the complexities derived by sales taxes on their business. Examples include identifying which jurisdiction a Company must register with, categorize what goods or services are subject to the applicable jurisdiction’s sales tax laws, manage exemption certificates when applicable, and handle issues unique to each jurisdiction.