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Insights Value Added Tax (VAT) Guidelines: USA

Value Added Tax (VAT) Guidelines: USA

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published on 30 March 2022

 

 

This country summary is part of the comprehensive Focus on VAT Fellows: International Value Added Tax (VAT) Guidelines »


 

VAT Scope/respectively Sales and Use Tax:

 

1. Which are the main provisions in the USA?

In the United States, forty-five states and the District of Columbia (Washington D.C.) impose a sales and use tax on retail sales of tangible personal property and some services. Only five states – Alaska, Delaware, New Hampshire, Montana, and Oregon – do not impose a sales and use tax. In addition, because of varying rates imposed by local counties and cities, there are well over 6,000 separate jurisdictions in the United States which impose sales and use taxes. Accordingly, rates of tax can vary considerably from state to state, county to county, or city to city. The combined rates generally rang range between 5.5 percent and 10 percent.

 

Sales and use taxes are generally defined as transaction taxes which are charged on sales to retail purchasers, end users, or consumers of certain tangible personal property and specific enumerated services. Use tax is a complementary tax imposed when property produced by a person or entity is consumed by the same or when property or services are consumed which were not initially subject to sales tax. The purpose of use tax is to ensure that taxable property which may have escaped sales tax is still subject to use tax. For example, an online retailer may make a sale to a purchaser in a state where the seller is not required to collect sales tax.  In this instance, if the property purchased is taxable, the purchaser will be required to pay the state use tax on the property.
 
While sales and use tax is often compared to the VAT common in most European nations, it is differentiated in that it is only imposed at the point where the goods are purchased or consumed by the end user. Accordingly, sales and use tax is generally charged at only one point in a transaction and persons or entities that do not sell to end users will generally not be required to submit to the same collection and reporting requirements that persons or entities selling to consumers will endure.  
 
Most states impose sales and use taxes on the sale of certain tangible personal property and some services. While the ultimate consumer or end-user is generally subject to sales or use tax on purchases of tangible personal property and certain enumerated services, it is the seller or dealer, however, that generally has the responsibility to collect sales and use tax from the consumer or end-user. The seller or dealer is then required to remit the taxes collected to the respective state. A seller or dealer can include individuals, partnerships, corporations or other entities which are engaged in a trade or business. 
 
Sales and use tax applies to all sales of tangible personal property unless a specific exemption is applicable. Conversely, sales of services are generally exempt from sales and use tax unless the service is specifically enu­merated as taxable. Determining exactly what constitutes tangible personal property is often key to deter­mining what is taxed. Historically, distinguishing between tangible and intangible personal property has been relatively easy. Advances in technology, however, have blurred the lines between tangible and intangible property. Computer software is an example of a technology that is often hard to classify. 
 
As mentioned, sales of services are generally not subject to sales and use tax unless the state has specifically provided that such services are taxable. Some of the more common taxable services include utility services, data processing services, commercial cleaning and laundry services, and telecommunication or data proces­sing services. Many states also provide that certain repair, maintenance, and warranty services are subject to sales and use tax. It is important to note that where a particular sale includes both the sale of taxable tangible personal property and non-taxable services, the entire transaction may be treated as taxable unless the non-taxable services are separately itemized on the customers invoice.
 
Sales or purchases of tangible personal property are generally considered taxable unless a specific sales and use tax exemption apples. While each state has adopted its own exemptions, there are common exemptions that exist in most states. It is important to note though that many of these common exemptions are not applied uniformly by the state. The more common exemptions include:
  • Sales to the U.S. government
  • Sales to state and local governments
  • Sales for Resale 
  • Sales of Production or Manufacturing Equipment 
  • Casual or Occasional Sales 

 

2. Threshold for distance selling

To assert jurisdiction over a taxpayer and exercise the taxing powers states possess, a state must have a connection to the taxpayer in question that is sufficient to justify the imposition of a tax. This connection, or nexus, is based on powers defined by the U.S. Constitution, certain federal statutes, and state constitutions and statutes. These documents rarely define nexus explicitly and often fail to provide clear, practical guidance. Instead, statutes and case law usually contain limitations on state taxing powers and, thus, only implicitly define nexus.  
 
The Due Process Clause of the U.S. Constitution prevents a state from taxing an entity with no connection to the state. To have nexus under the Due Process Clause, a taxpayer must purposefully direct activities toward a state and have a “minimum connection” with the state. The relatively low standard for establishing nexus under the Due Process Clause is often assumed to have been met.
 
The Commerce Clause grants Congress the power to regulate U.S. commerce with foreign nations and among U.S. states. It implicitly prohibits state laws that discriminate against or interfere with interstate commerce by imposing taxes on out-of-state persons with no connection to the state and, thereby, unduly burdening inter­state commerce. The nexus requirements contained in and implied by the Commerce Clause have, over time, evolved and have come to mean “substantial nexus.” 
 
Substantial nexus includes a physical presence requirement, and this requirement is generally satisfied if any of the following occurs within the state:
  • owning real or tangible personal property
  • renting or leasing property
  • working or traveling by employees

The amount of activity or connection that is necessary to create nexus tends to vary from state to state. Most states consider the maintenance of an in-state office or ownership of in-state revenue producing property adequate activity to create nexus, whereas the mere presence of any property within its borders is considered to create sufficient nexus in a few states. In addition, a U.S. Supreme Court case decided in 2018 (“Wayfair”) allowed the state of South Dakota to require an online furniture and home décor retailer, Wayfair, to collect and remit sales taxes. This case was based on a South Dakota law that deemed sales of USD 100,000 or more or 200 or more transactions to customers in the state to constitute “nexus” for sales tax purposes. Since Wayfair, every state with a sales tax now imposes this “economic nexus” standard with most states adopting the USD 100,000 and 200 transaction thresholds upheld by the Court. Larger states, such as California, New York and Texas, impose a USD 500,000 sales threshold.

 

3. What are the consequences when a threshold is exceeded?

Generally speaking, the seller is required to collect tax in the jurisdiction where the possession of the property by the buyer takes place or in the case of taxable services, where the services are received.  This assumes, how­ever, the seller has the requisite nexus in the jurisdiction for the collection obligation to be imposed. Determining whether the requisite nexus exists can sometimes be challenging as it depends on the activities of the seller and its agents, among other things.
 
It should be noted that whether a company has a permanent establishment in the United States is generally irrelevant in determining whether a company has established nexus for sales and use tax in a particular state. States generally do not recognize U.S. tax treaties as applicable to state and local taxation. Therefore, even though a company may not have a permanent establishment in the United States, it may still have established nexus for sales and use tax in one or more states.
 

4. What obligations exist for foreign EU Companies which exdeeded the distance selling threshold in the USA?

Once a company has established that it has nexus for sales and use tax with a particular state, it is obligated to register for sales and use tax with the Department of Revenue in that state. Subsequently, the company will be required to collect and remit sales tax on all taxable sales. Each state will have its own unique registration forms and procedures, which can be found on the website of each individual state’s taxing authority. Addition­ally, registration forms will typically inquire as to when the business entity began doing business in that parti­cular state. Where the company registers after it has begun doing business or has established nexus, it may be liable for the failure to collect sales and use tax for the period from which it established nexus to the point where it actually registered to collect sales and use tax. Importantly, it is the company’s responsibility to determine whether it has established nexus for sales and use tax and to register with the state.
 
Upon registration, the state will determine the sales and use tax return filing frequency. Taxpayers will typically be required to file sales and use tax returns and remit collected sales and use tax on either a monthly, quarterly or annual period, generally depending on the historical amount of sales reported. As a practical matter, most taxpayers will begin filing monthly and, if total sales volume is minimal or sporadic, may receive permission from the state to file sales and use tax returns either quarterly or annually.

 

5. What about direct e-Commerce as an example Business Case?

If a company has established nexus with the jurisdiction as described above, the same obligations exist for direct e-commerce as with any other type of commerce in the United States. If a company engaging in direct e-commerce does not have nexus with a jurisdiction, then the company has no sales tax collection obligation in the USA. 

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