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7 Key Points Foreign Sellers Should Know about U.S. State Taxes

author photo of Sylvia F. Dion

Often when I blog on U.S. Sales Tax for Foreign Sellers I blog based on questions my clients are asking or information and updates I'm providing. One topic I often discuss with my foreign (non-U.S.) clients and other foreign sellers that send questions my way, is the topic of “other” U.S. state taxes that a foreign seller may be subject to.

That’s correct! A foreign seller may have an obligation to file (lodge) and pay state taxes other than a state’s sales tax.

And indeed this topic is fresh in my mind because it just so happens that today I am quite busy preparing and filing the Texas Franchise Tax return for several of my foreign Amazon FBA clients. This is because the Texas Franchise Tax is one such example of an “other” type of state tax that foreign sellers may be subject to.

You see, in the same way that a foreign seller may be required to register, collect and remit (pay) sales tax on product sales to U.S. consumers, a foreign seller may also be required to file (lodge) and pay “other” types of state taxes. This is because the various states rules may require that a foreign seller who engages in certain activities has “nexus” for a state’s corporate income, franchise, gross receipts or other business taxes. (Remember having “nexus” means that the foreign seller has made a sufficient “connection” to the state according to a state’s laws to require the foreign seller to comply with those laws.)

And so today I thought it would be a good idea to write a post with some key points that foreign sellers should know about “other” types of state taxes they may have an obligation to comply with. Thus, without further adieu, here are 7 key points that foreign sellers should know about “other” types of state taxes:

  1. Tax Treaties do NOT Exempt Foreign Sellers from State Taxes: Even though a foreign seller that "engages in business" in the U.S. is from a country that has entered into a Tax Treaty with the United States, our various States are not a “party to” or bound by any bi-lateral Tax Treaty that our U.S. government enters into. Therefore, although a foreign seller may be exempt from U.S. federal taxation because they meet the bi-lateral treaty provisions, the same seller could still be subject to a state’s various tax obligations. (You can read more about on this at my prior post: Tax Treaties and U.S. Sales Tax Nexus: What Foreign Sellers Need to Know)
  2. A Foreign Seller Can Have Nexus for Various Types of State Taxes: A foreign seller may engage in activities in the U.S. that create “nexus” with our various states for sales, corporate income, franchise, gross receipts or other state business taxes. Examples of activities that can create “nexus” for various types of state taxes include: 1) Having product inventory (stock) in a U.S. fulfillment center where the seller continues to own the product inventory until it is sold and shipped to a customer, and 2) using an “agent” to solicit sales, fulfill orders or perform a variety of other duties on behalf of the seller. (You’ll recognize these two as key activities that Amazon FBA sellers engage in.)
  3. States Have Different Nexus Rules for Each Type of State Tax: In addition to each state being a separate and independent government with its own set of rules and regulations, within each state you will find separate rules for each type of state tax. That’s right! A specific state will have one set of rules for whether an out-of-state (and that includes a foreign) seller has “nexus” for sales tax purposes and a separate set of rules for whether an out-of-state/foreign seller has nexus for a state’s corporate income or franchise tax.
  4. A Foreign Seller Can Have Nexus for One Type of State Tax but Not Another: Because there are different rules for each type of tax (even within the same state), a foreign seller can have nexus for one type of tax but not for other types of state taxes imposed by the same state. As a general rule, the threshold for sales tax nexus is often lower than it is for corporate income tax nexus – this means that a foreign seller may have nexus for sales tax purposes, but not necessarily for the same state’s corporate income tax. However, another general rule is that a foreign seller that has nexus for sales tax purposes, will also have nexus for franchise tax purposes (as an example if you’re a foreign Amazon FBA seller with sales tax nexus in Texas, you are also subject to the Texas Franchise Tax).
  5. Unlike Sales Tax, Other State Taxes are the Seller's Out-of-Pocket Expense: The sales tax is charged and collected from the final consumer (usually at the point of sale) and reported and remitted (paid) by the seller. In effect, the final consumer is the party that pays the sales tax and the foreign seller is simply collecting and remitting the sales tax to the state or local (city, county or district) government that it belongs to. However, a state’s corporate income, franchise, gross receipts or other business taxes are paid by the foreign seller. Thus, these other state taxes are an out-of-pocket expense of the seller.
  6. Failing to be in Compliance with the Various State Tax Rules Can Have Serious Consequences: Many foreign sellers – especially those who are just becoming familiar with the U.S. sales tax requirements – are not aware of or do not consider that they might also be subject to other states taxes in addition to their sales tax collection and remittance obligations. If you are working with a tax advisor or managing your own sales tax filings and remittances (such as through a sales tax software program), it is extremely important to make sure you (and/or your tax advisor) are aware of and can advise you on what is necessary to comply with a state’s various tax obligations. Failing to comply with these "other" state tax obligations could lead to assessments and a state revoking a seller’s sales tax permit.
  7. Selling in the U.S. Can Create Many State Tax Obligations for a Foreign Seller: The final and important point – there is a lot to know about selling in the U.S. and the various state tax obligations this creates. These go beyond simply complying with a state’s sales tax requirements.

 

As you can see from the 7 points above, there is a lot to know and consider when seling in the U.S. Which is why I'll be writing in more detail about some of these key points. So stayed tuned - there's more to come.

 

About the Author: Sylvia F. Dion, MPA, CPA, is the Founder and Managing Partner of SALT Consulting firm, PrietoDion Consulting Partners LLC. Sylvia has been covering Internet Sales Tax developments for SalesTaxSupport’s Issues blog since 2011. Sylvia is also the “U.S. Sales Tax for Foreign Sellers” contributor for SalesTaxSupport’s Industry blog and the “Massachusetts Sales Tax” contributor for SalesTaxSupport’s State blog. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at sylviadion@prietodiontax.com or at 978-846-1641.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

14 Responses to 7 Key Points Foreign Sellers Should Know about U.S. State Taxes

  • Posted by James on September 15, 2017 12:28am:

    Dear Sylvia,
    We have an Inc in Washington state, a warehouse in Idaho but are planning to supply our direct customers from our warehouse and company in Europe. Do we only pay sales tax in Washington and Idaho - or everywhere in the US?

    • Posted by Author photo of Sylvia F. Dionsylvia Dion on September 24, 2017 9:49am:

      James,
      Thank you for your comment/question. There is an important fact missing from your question - which is what company is doing the selling. You say you have an Inc. in Washington and also a company in Europe and also have a warehouse in Idaho (but do not indicate which company owns or leases the Idaho warehouse or if it is operated by a 3rd party fulfillment service company or whether the Inc or foreign company is doing the selling). Since there are important facts missing, I can only provides you some general answers. First, organizing an entity in a state would mean the entity has nexus in the state of organization (so the Inc. would have sales tax nexus in Washington and also be subject to something called the Washington B&O tax). Also owning or leasing a warehouse or using a 3rd party fulfillment center and storing your inventory in a state are all things that would create sales tax nexus in the warehouse state. So whichever company is doing these things (Inc or foreign company) would have nexus in Idaho. I would suggestion obtaining the proper tax advice if this an important issue for you. By the way, I do advise on these topics - a consultation can be requested by clicking on the "Take Me There" link that is in the author's box under the blog.

  • Posted by Feridun on September 2, 2017 12:00pm:

    Great articles, thank you. I'd like to clarify a scenario, if I may?

    We are a UK based company with no staff or premises in the USA.

    We are looking to resell software subscriptions (invoiced monthly) that we purchase from a US- distributor (in Washington state) to US customers.

    The US distributor will invoice us and in turn we will invoice our US customers (with a markup of course). My questions are:

    1) Should the US distributor apply Sales tax?
    2) if it does, is there any mechanism to recover it?
    3) Do we have to charge Sales tax to the US customer?

    Any response would be most appreciated. Thank you.

    • Posted by Author photo of Sylvia F. DionSylvia Dion on September 22, 2017 9:32pm:

      Feridun,
      Thank you for reading my blog post and your question/comment.

      You have touched on one of the most complicated areas in sales tax - the taxation of software subscriptions. While I cannot give you "tax advice" in a response, I can give you some general guidance. First, a distributor may be required to charge you sales tax. If you can provide the distributor with a resale certificate, then your distributor might not be required to charge you sales tax. In the U.S. when a vendor (such as your company) purchases a product for resale - the purchase can be exempt from sales tax if you provide the distributor a resale certificate. If you are charged sales tax, you cannot recover it. And if your company does not have nexus to any U.S. state, then you would not be required to charge your customers sales tax. I hope this helps.
      Sylvia

  • Posted by Susan on December 8, 2016 1:07am:

    Hi Sylvia,

    Your blog is the most helpful one I've ever seen, thanks a lot!

    I have a question about federal sales tax and state level sales tax, does that mean seller needs to pay tax to both federal government and state government? For example, we are a Hongkong company, as I know, Hongkong doesn't has a treaty with US, does that mean we need to report to both federal and state governments for the taxation?

    Besides, Amazon asks all foreign sellers to submit w8 form for exempt from US tax report and Amazon transfers us full payments, no tax deducted ever. But per my understanding from your articles, we will still need to report the tax, soon or later federal government will track our EIN and come to us, right?

    And for state level tax, we need to report to the state of Amazon warehouse we keep inventory in or to the state where the final customer stays?

    Thank you!

    Susan

    • Posted by Author photo of Sylvia F. DionSylvia Dion on December 13, 2016 11:20am:

      Susan,
      Thank you so much for the very kind comment and also for the question.

      While I cannot give you specific tax advice in a reply, I can give you some general answers.

      Sales tax in the U.S. is managed by each individual state - there is no federal sales tax like there is in other countries. However, federal INCOME tax CAN apply to foreign Amazon FBA and eCommerce sellers that sell in the U.S. You are correct, there is no tax treaty between Hong Kong and the U.S. Therefore, a Hong Kong company cannot claim they are exempt from U.S. federal income tax due to a treaty and so yes, a Hong Kong company may need to pay U.S. federal income tax. Also, the IRS Form W-8 or W-8BEN-E does NOT exempt a foreign seller from having to file a U.S. federal income tax return - that is not the purpose of the W-8 or W-8BEN-E. (I plan to write a post on this topic in 2017 because many foreign sellers are confused about this).

      A foreign seller from a treaty or a NON-treaty country may also have to pay state taxes (like the ones I describe in this post) and register to collect sales tax in certain states. An Amazon FBA seller usually has to register, collect, file and pay sales tax in states where their inventory is located. Here's a post I wrote on this topic: http://www.salestaxsupport.com/blogs/industry/us-sales-tax-for-foreign-sellers/amazon-fba-international-tax/

      I hope this helps.

  • Posted by Susan on December 8, 2016 1:07am:

    Hi Sylvia,

    Your blog is the most helpful one I've ever seen, thanks a lot!

    I have a question about federal sales tax and state level sales tax, does that mean seller needs to pay tax to both federal government and state government? For example, we are a Hongkong company, as I know, Hongkong doesn't has a treaty with US, does that mean we need to report to both federal and state governments for the taxation?

    Besides, Amazon asks all foreign sellers to submit w8 form for exempt from US tax report and Amazon transfers us full payments, no tax deducted ever. But per my understanding from your articles, we will still need to report the tax, soon or later federal government will track our EIN and come to us, right?

    And for state level tax, we need to report to the state of Amazon warehouse we keep inventory in or to the state where the final customer stays?

    Thank you!

    Susan

    • Posted by Author photo of Sylvia F. DionSylvia Dion on December 13, 2016 11:23am:

      Susan,
      Thank you again for the kind comment. I believe you posted your question/comment twice. Please see my response above to your comment.

  • Posted by mamoun on November 3, 2016 8:01am:

    Hi Sylvia !
    i'm selling with amazon FBA, I live in Vancouver Canada, and I don't have any company yet in Canada or in the USA.
    I did some research and I found out that I have to start to collect taxes in different states because of FBA who send inventory in different states ( Actually I have 15 states where my inventory is)
    My question is :
    1)what the best structure of company do you suggest me to have for someone who live in Canada ? Do I need an LLC or LP in USA? Do i have to incorporate in CANADA also ?
    2) CANADA and USA have treaty for sales tax I believe, I will not be double taxed right?
    3) to be register in different states, some states need ITIN, but to obtain this number I need sales tax, I don't have it and I don't know how to have it ..

  • Posted by Sam on November 3, 2016 2:56am:

    Hi, we would like to ship products from our UK warehouse to customers in New York. The order will be shipped directly to the customers address via DHL Express from the UK. We have no affiliation or office or other form of physical connection in the USA so would we be exempt from charging sales tax and resgistering a nexus in NY?

    • Posted by Author photo of Sylvia F. Dionsylviadion on November 26, 2016 1:38pm:

      Sam,
      Thanks for your question/comment.

      Based on the facts you describe, it does not appear that you have nexus in New York (just having customers in New York does not create nexus). Therefore, if your UK business does not have nexus in New York, it would not be required to register for or collect New York sales tax.

      Hope this was helpful.
      Sylvia

  • Posted by Veronika on October 12, 2016 5:08am:

    Hello!
    Thank you for such great, comprehensive information. Now I have a questions of my own :)
    I'm based within the EU and offer B2B consultations as well as B2C coaching (individual and in group program setting) - so only services, all offered electronically/online/phone etc. I am not physically connected to any place in the US nor have any partner/representation or the like. So, if I understand correctly, that whenever a US business entity or a US private individual finds my website and buys one of my services, that I do not need to collect and report US sales tax?
    If this is not correct, do you know to whom/where I can turn for more direct advice?
    Thank you! Greatly appreciate your guidance!

  • Posted by elisabet on September 23, 2016 3:04am:

    We are an Spanish company, with a purchase order from a university of California.
    We have presented them a quotation without any kind of taxes and they have send us the purchase order adding the 8% for sales tax.
    Taking into account that we do not have any kind of nexus in USA, we do not have to collect any kind of taxes, right ?
    We do not have to invoice those taxes to our customer, right?

    • Posted by Author photo of Sylvia F. DionSylvia Dion on October 2, 2016 3:38pm:

      Elisabet,

      Hello and thank you for your comment/question.

      If your are fulfilling (shipping) the order from outside of California and your company has no nexus in California (no offices, employees, inventory, agents, related companies in California), then you are correct that you are not required to charge the California customer sales tax on the order. You may want to inform the customer that you are not required to charge California sales tax on their order so that they are aware that they must self-assess and pay the California use tax directly to California.

      I hope this was helpful.

      Sylvia

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