Critical Sales Tax Compliance Steps Foreign Sellers Must Know
As an international e-commerce seller, which may be obvious if you’re selling on Amazon.com and using FBA, it’s one of the best, most strategic ways to grow your international business. What may be less obvious are all the steps (and the correct sequence) required to get into compliance with U.S. taxes, including sales tax, and the ongoing requirements BEFORE you make the all-important decision to expand your business into the U.S. market. There are many critical sales tax compliance steps foreign sellers must know.
Update: Since the recent U.S. Supreme Court Case, South Dakota vs Wayfair (June 21st, 2018), now all e-commerce sellers, even if you are shipping from outside the U.S., need to be aware of the U.S. sales tax rules. You may now pass a threshold of sales or units of sales in a state and be required to collect and remit sales tax.
Here is what you need to know…
Are U.S. Tax Returns Required by Foreigners Sellers? Don’t Believe What You Read
There are many critical sales tax compliance steps foreign sellers may overlook due to recent changes. You may have seen articles in blogs and online that foreign sellers have NO responsibility to file any U.S. tax returns, which is simply NOT true for e-commerce sellers. Articles point to factors like are you engaged in a U.S. trade or business, do you have dependent or independent agents, or did you create a permanent establishment (P.E.). These are crucial factors to determine if your foreign entity has a responsibility to pay and file a U.S. federal tax return, but are, for the most part, unrelated to U.S. sales tax, which is at the state level. What this means is as an e-commerce, you will have nexus in many U.S. states (up to 25 or more) with your stock (and another 11 or so with economic nexus thresholds), and the federal tax treaty does not cover state tax law. The result is that your foreign company will need to collect and remit U.S. sales tax.
Examples are given that if you are only selling $50,000 in total U.S. sales, don’t worry about U.S. sales tax – which means your sales are too low and perhaps only 30-40% of those sales will be in states where you have nexus or stock and the amount of sales tax due may only be 10%, even with penalties and interest. At this level, you may only owe $1,500 in sales tax, plus penalties, interest and late fees…so you may wait until you go through the steps for compliance. Some authors make the next jump to some exaggerated number that says, “Well, if you are at $10-million in overall sales, then you should take a closer look at sales tax,” which is ridiculous.
What are the Steps Required for Compliance as a Foreign Sellers?
● The Tools to Track Your Sales Tax Liability to Determine when You Move to Get into Compliance. This is key because managing your cash flow as an Amazon FBA is key to your success. If you let sales tax “get ahead of you” and you wait too long to get in compliance, you may quickly find your business owing $10K, $20K, $50K or more in past sales tax, penalties, interest, and late filing fees. If you are behind on sales tax, read our blog post how to get back on track.
● Determine Which States You have Nexus. This is now in two forms, one is physical nexus (FBA stock) and economic nexus (level of sales or units sold). As an Amazon FBA seller, you know your stock/inventory will move very quickly to many FBA states, which triggers nexus and a fast-building debt until you get registered with a permit to collect and remit sales tax. Your stock may quickly spread to 15-20 FBA states where each time your stock is in a state it “rings the bell” for sales tax nexus (even Washington). But before you jump into registration, there are other key points to keep in mind.
● Determine How You Want to Do Business in the U.S. This is an important decision that is not well thought through most of the time. There is a lot of content that points to keeping everything simple and operating through your foreign entity. That is certainly simpler; but just remember, “Simple” and “Asset Protection” are inversely related. If you want more protection, don’t put your e-commerce business into ONE LEGAL entity. Here are the options and factors to consider.
○ Use your foreign company and obtain an EIN in the U.S. or
○ Form a separate U.S. company with an EIN.
● Advantages of Forming a Separate U.S. Company Include:
○ Liability Protection (Separation of Home Country Assets and U.S. Assets).
○ More Ecommerce Sales Overall. Why? U.S. consumers prefer to buy from a U.S. company.
○ Forming a U.S. company will Develop a Stronger U.S. Brand.
○ More Trust = More Sales.
○ Joint Ventures. You will have many more opportunities to work on joint ventures or deals with other U.S. companies when they negotiate and sign a contract with ANOTHER U.S. company vs a foreign company.
○ Affiliate Sales. Affiliates would much rather work with a U.S. company and same with many affiliate programs.
○ U.S. Bank Account. Most banks (which require travel to the U.S.) will only open a U.S. bank account for a U.S. entity with the correct address service and other items in place.
○ Lower Taxes. It is possible, with the new tax law changes for 2018, you may save on overall taxes on your profits.
○ Work VISAs. A U.S. company facilitates more options to obtain work VISAs (including the E1 or L1 VISA).
Go here to learn more about our prices and services for a complete U.S. formation.
● Disadvantages of Forming a U.S. Company (Properly).
■ Cost to Set up a Complete Formation Properly. There will be upfront expenses and ongoing maintenance, typically with annual state fees, annual reports and tax returns, and a U.S. return.
■ Two Companies to Operate. You would have a company in your home country and one in the U.S.
■ Right Support Required. Obtaining the wrong support is expensive.
■ Understanding of Taxes. Once you “ring the IRS bell” and apply for an EIN number (also called Tax ID), you will need support with the right professionals to make sure the correct U.S. return is filed properly.
● U.S. Address for Mail Forwarding and Scanning Purposes
○ When applying for sales tax permits, there are several states that you will NOT be able to apply online for a sales tax permit and will need to mail in your application.
○ When you mail in those applications, the state completes them. The state will mail the sales tax permit or next steps to your mailing address on file. If that is an address in your home country, you may not ever receive your permit for TWO REASONS: the states, when sending mail, do NOT pay close attention to the CORRECT POSTAGE or your FOREIGN address, so you are NOT likely to receive ANYTHING in the mail.
○ The solution is to work with a company that applies for sales tax permits AND has a U.S. address service that will scan and link the email as part of their sales tax permit service. Yes, you will find a “cheaper” virtual address/mail forwarding solution, but with ZERO experience with sales tax and what to look for with permits that may cost you a fortune in timing and mistakes.
○ You want to make sure the company you work with understands what creates a permanent establishment and what does not. Be careful with states like New York, where a P.O. box may create sales tax nexus. (see regulation Section 526.10(a)(4)(i)(e)). Nevada is an FBA state and does not create automatic nexus which is important.
● Sales Tax Permits. When you sell on Amazon.com FBA, you will have a responsibility in the states you have nexus (stock) to collect and remit sales tax as a third-party seller. Washington is an exception, where you will still need to register for a sales tax permit and file sales tax returns, and Amazon will submit the sales tax due. In all the other states, where you have FBA stock (even South Carolina), you will need to register for a sales tax permit (or a license) to legally start collecting sales tax. As a foreign seller, this process can be very difficult without a SSN, but it’s possible (except for recent issues with Arizona).
● Update Shopping Cart/Platform Tax Settings. Once you have your sales tax permits, you will want to turn on your tax settings on your web site and all the platforms you sell including of course, your Amazon Seller Central account.
● U.S. Bank Account Service. In order to remit sales tax back to the state, you will need to file a state sales tax return and send the state the sales tax owed. The second part sounds simple, but it will require a U.S. bank account to automate this process via an ACH (a direct debit from a U.S. bank account).
● Remit Sales Tax (the final step in the process). There are several great software companies that automatically remit sale tax. They typically have two fees. One is a monthly subscription based upon the number of transactions you have per month. This may range from $20-$100 per month. Second is your fee to file state sales tax returns, which may range from $20 to $30 per sales tax return.
Each state has separate income and franchise tax filings and responsibilities. You must have access to the right information beyond just remitting sales tax.
You will want guidance on the following steps at the state level:
● Foreign Qualification. This means your foreign entity or U.S. company will register to do business in a state. That state may have requirements based upon the type of entity and taxation of that entity. This requires several steps to foreign qualify to do business in a state and one is having a registered agent.
● State Tax Returns. Several states may require a state tax return, depending upon how your entity is taxed in that state.
● Federal Tax Return. Depending on how you are structured to do business in the U.S. will determine if you are filing an 1120-F protective return or a full 1120 U.S. tax return.
○ Registered Agent Services
■ Online filing vs paper application
■ End of the day, states are changing whether or not you apply online or file a paper application.
● Federal Tax Treaties. The U.S. may have a tax treaty with your country. It is important to determine if your structure and situation qualifies for treaty benefits. Here is a list of the countries: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z We work with a top U.S. tax attorney that understands U.S. tax laws and cases, that will consult with you on tax treaty benefits.
In summary, there are a lot of steps for a foreign seller to access to properly get into compliance with Sales Tax as an e-commerce seller. The best news is that NCP (Sales Tax System and our professional resources) is the best one-stop-shop for compliance to support you while you focus your time and energy on your e-commerce business!