Explore the requirements and rules that apply to Indirect Taxes in United States.
Explore the requirements and rules that apply to Indirect Taxes in United States.
Types of indirect taxes (VAT/GST and other indirect taxes).
The United States (US) does not have a national sales-tax system. Rather, indirect taxes are imposed on a sub-national level. Each state has the authority to impose its own sales and use tax, subject to US constitutional restrictions. In many states, local jurisdictions (e.g. cities and counties) also impose sales and use taxes.
Are there other indirect taxes?
Depending on the jurisdiction, taxpayers may be subject to property taxes, excise taxes, telecommunication taxes and surcharges, business license responsibilities and unclaimed property-reporting requirements.
What transactions are subject to sales and use taxes?
In general, transactions involving sales of “tangible personal property” and select services are subject to tax. States have varying definitions of tangible personal property. A number of states also tax digital goods (e.g. digital audio works, e-books, streaming video). Most states limit the tax to services specifically enumerated by statute. However, a few states tax nearly all services.
What are the standard or other rates (i.e. reduced rate) for sales and use taxes?
There is no national sales tax in the US and therefore no standard rate. Sales or use tax rates vary by state, ranging from 2.9 to 7.25 percent at the state level. In addition to the state rate, local governments in 35 states impose an additional sales or use tax ranging from 1 to 5 percent.
Various states also offer reduced or zero rates on certain types of property, such as food for home consumption, residential utilities and manufacturing-related machinery.
Who is required to register for sales and use taxes?
Typically, every person or entity that is engaged in the business ― as defined by the taxing state ― of selling tangible personal property at retail, or furnishing any taxable service, must register with the state to obtain a sales tax license, permit or certificate before making sales or providing services. What counts as engaging in business varies from state to state.
States are moving toward determining whether a seller is engaged in business in the state based on economic thresholds, such as annual volume of sales or number of transactions (e.g. over 100,000 US dollars (USD) of in-state sales or over 200 in-state transactions). This is the result of 2018 US Supreme Court decision South Dakota v. Wayfair, which overruled an earlier court decision prohibiting states from imposing a sales tax collection obligation on a seller unless the seller had a “physical presence” in the state. Already, 24 states will have economic thresholds in effect by 1 January 2019 and more are expected to soon follow.
Is voluntary registration for sales and use taxes possible for an overseas company (e.g. if the annual turnover is below the relevant VAT/GST and other indirect taxes registration threshold)?
Yes, an overseas or out-of-state company without substantial nexus in a state may voluntarily register for collection of sales or use tax. A taxpayer voluntarily registering for sales or use tax is subject to the same duties and obligations as a taxpayer who is required to register and will be required to file returns and comply with the laws of that state.
Are there any simplifications that could avoid the need for an overseas company to register for sales and use tax?
Does an overseas company need to appoint a fiscal representative?
Some states may require an overseas or out-of-state registrant to have a registered agent in the state to receive official notices such as service of process for legal action. The state may require a bond or deposit prior to issuing a sales tax permit to a foreign or out-of-state business.
Which forms and supporting documentation does an overseas company need to submit for sales and use tax registrations?
Sellers, vendors and retailers can register with the various states by registering with the state tax authority website or filing a form with the state’s tax authority. Each state may have unique requirements for which information and documents are required for registration.
Generally, each separate legal entity must register for its own sales tax permit, regardless of its tax classification. A separate application may also be required for each place of business.
Is grouping* for sales and use taxes possible?
Generally, each separate legal entity must register for its own sales tax permit and file separate returns with the state taxing authority.
Most states require or permit the filing of a consolidated sales/use tax return when a single legal entity operates more than one location within the state. A few states require a minimum number of business locations before a consolidated return is allowed. Some states require prior approval to file on a consolidated basis.
How frequently are sales and use tax returns submitted?
Sales and use tax returns must be filed either annually, semi-annually, quarterly, monthly or semi-monthly, depending on state requirements. Filing frequency is commonly based on the taxpayer’s sales volume and the amount of tax that the taxpayer collects during the period. Monthly filing is most frequently required.
What are the exchange rate rules in your country?
Varies by jurisdiction.
Exports – Goods
How are exports of goods treated?
Sales of goods for delivery outside the state are generally not subject to sales tax, although exceptions apply. For instance, if transfer of title occurs within the state or the purchaser obtains possession of the goods within the state, sales tax may be due.
Exports – Services
How are exports of services treated for VAT/GST purposes?
The taxability of a service may depend on where the service is performed or where the benefit is received, depending on the taxing state. In general, services exported outside the US should not be subject to sales tax.
Imports – Goods
How are goods dealt with on importation?
Sales of goods from outside a state (whether from another US state or foreign country) for delivery into the state are generally subject to sales or use tax (unless an exemption or exclusion applies). If a good is imported into a state by a purchaser that did not pay sales tax on the good, use tax may be due.
Imports – Services
How are services brought in from abroad treated for VAT purposes?
Sales of services that are performed or received within a state from a seller located outside the state (from either another US state or foreign country) are generally subject to sales or use tax. Recall that only specifically enumerated services are taxable in most states. If a vendor does not charge sales tax on a taxable service performed or received in the state, the purchaser may be liable for use tax.
Can an overseas company recover sales and use taxes if not registered for sales and use taxes locally?
Not applicable in the US.
Are there any exemptions with the right to recover or deduct input VAT?
Although there is no system to recover sales and use tax, states do provide various exemptions from tax based on particular activities of the buyer. States provide various exemptions from sales or use tax, such as an exemption for goods purchased for resale or materials or machinery and equipment purchased for use in manufacturing. Exemptions are specifically stated within a state’s sales or use tax statute and the burden of proving an exemption is on the taxpayer.
Generally, exemptions are based on either the type of entity purchasing the property, the type of property being purchased, the intended use of the property or the type of transaction. Exemptions that apply at the state level generally also apply at the local level. Exemptions are generally applicable to both sales and use tax.
Are there any restrictions to the deduction of input VAT?
Not applicable in the US.
When is sales or use tax due on a supply of goods or services?
In most states, sales tax is due when a taxable sale has occurred. A sale has occurred when transfer of title or possession of a good has occurred or when a service is performed in exchange for consideration.
Is a business required to issue tax invoices?
In most states, invoices or receipts are required for each transaction. However, each state has its own requirements for how tax must be stated on the invoice.
To claim a sales tax exemption, the purchaser is generally required to provide the vendor with an exemption certificate certifying that the sale is exempt. The form and requirements of exemption certificates are unique to each state.
Is it possible/mandatory to issue invoices electronically?
Yes, the use of electronic data interchange (EDI), advanced digital signatures and other forms of electronic invoicing is permitted by most states. For a taxpayer that uses EDI processes and technology, the level of record detail, in combination with other records related to the transactions, must be equivalent to that of an acceptable paper record. The requirements for an EDI accounting system should be similar to that of a manual accounting system.
Is it possible for the vendor to issue an invoice (self-billing)?
Some states allow certain taxpayers to use a direct pay permit to remit use tax to the state in lieu of paying their vendors sales tax on their purchases.
How long must records and invoices be retained?
This requirement varies by state but generally three to five years.
Can the invoices be stored abroad?
Most states have not directly addressed this issue.
Do tax audits take place on a regular basis?
Yes. Depending on the taxpayer and the state, taxpayers can be on an audit cycle of 3 to 5 years based on the jurisdiction’s statute of limitations.
Are audits done electronically in your country (e-audit)? If so, what system is in use?
What penalties can arise from non-compliance?
As a general rule, states impose penalties for failure to timely file a return and pay taxes due. The maximum penalty imposed by most states, in cases other than fraud, is 25 percent of the amount of tax due. However, some states are much more aggressive, assessing and imposing maximum penalties in excess of 25 percent. Generally, a state’s penalty for late payment of tax is imposed at the same rate as its penalty for late filing.
Are there any special rules for the sale of a company by one taxpayer to another where sales and use tax is not due on the sale?
Some states offer a type of exemption for occasional or bulk sales (sales outside of the seller’s ordinary course of business and sales of entire lines of business). Specific application of rules and definitions varies by state. Sales of intangibles (i.e. stock in a corporation) are not generally subject to tax.
Are there unique specific indirect tax rules that you would not expect to find in ‘standard’ VAT jurisdictions?
Because each state has authority to enact its own sales and use tax laws, there is no ‘standard’ in the US.
Does a reverse-charge mechanism apply for goods or services?
Not applicable in the US. However, if a seller does not collect sales or use tax on a taxable transaction, then the buyer may be required to accrue use tax. Unlike for a traditional VAT reverse charge, use tax is a final cost to the business accruing the tax (i.e. there is no input tax credit).
Are there indirect tax incentives available (e.g. reduced rates, tax holidays)?
Yes, sales and use tax incentives are often offered to encourage taxpayers to locate business in economically disadvantaged areas to reduce the company’s impact on the environment or to achieve other economic or social ends. Such incentives vary by jurisdiction.
Are rulings and decisions issued by the tax authorities publicly available?
Yes, the rules and applicability vary by jurisdiction and often may be found on the tax jurisdiction’s website.
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*By ‘grouping’ we mean: either a consolidation mechanism between taxpayers belonging to the same group (payment and refund are compensated but taxpayers remain distinct) or a fiscal unity for VAT/GST purposes (several taxpayers are regarded as a single taxpayer).