If you’ve made your way to this blog post, you’re probably an international seller that has begun to sell (or will soon be selling) to customers in the U.S. Or perhaps you’re an international seller that is wondering whether you’ll have to collect sales tax if you sell to U.S. customers. Or maybe you are using (or plan to use) a third party order fulfillment service, such as Amazon’s FBA service, to manage your inventory and fulfill your orders and you’re wondering what sales tax requirements this will create for your international business.
Whatever the situation is – you’re an international seller that is concerned with U.S. sales tax and wants to know more about your potential sales tax obligations. So today I’ll be explaining the requirement to register for sales tax collection purposes and some important concepts that an international seller should be aware of.
But before I launch into today’s post, it's important to quickly revisit my last post where I wrote about U.S. Sales Tax for Amazon FBA International Sellers. In that post I explained that using Amazon’s Fulfillment by Amazon (FBA) service creates a connection to those states where an FBA seller’s inventory is located and from which orders are fulfilled. In that post, I also explained that this connection (referred to as “nexus”) means that the Amazon FBA seller has a requirement to charge and collect sales tax on sales to customers in the “nexus” state. (In a way, today's post is the second installment of a 3- part series which addresses the sales tax registration requirements of international sellers of goods, such as those that sell on Amazon's U.S. marketplace. If you are an international seller of goods and sell to U.S. consumers, then I encourage you to read the first installment post in this 3-part series.)
In addition to my last post, I also wrote another related post (which was actually my first post in this "U.S. Sales Tax for Foreign Sellers" blog). In that post, I explained how each of the States has its own sales tax rules and that even though a seller may be from a country that enters into a tax treaty with the United States, a bi-lateral tax treaty does not protect an international seller from the various states' sales tax laws. (Since that post is a good basic primer on this issue, I also encourage you to read my June 18, 2013 post, "Tax Treaties and U.S. Sales Tax: What Foreign Sellers Need to Know")
Once an international seller realizes they have a requirement to register to collect tax, this often leads to more questions, such as what it means to “register”, whether they must create a company in the U.S. in order to register, or how to go about registering.
1. What Does It Mean to Register?
For many international sellers, the term “register” means to form or incorporate a new business entity. However, in the United States, the term “register” is not used to describe the formation or incorporation of an entity – here we simply say we are “forming” or “incorporating” a business entity (such as a partnership, Limited Liability Company, or a corporation).
If a seller has nexus to a state the seller has an obligation to collect tax on sales to customers in that state (this same obligation would apply whether the seller is an international seller or a U.S. seller). However, a seller cannot collect sales tax until they apply for (i.e., “register”) and have obtained a sales tax permit from the state in which they have nexus. Therefore "registering" means that the business entity has filed an application to obtain a sales tax permit which allows the seller to collect tax on sales to customer ins the state. Here's another thing to note - in some states a seller is registering for a sales tax permit, in others states they are registering for a use tax permit, and yet in another state they may be registering for a business license - however, in this post, I use the phrase "sales tax permit" to mean any type of permit or license that allows a seller to collect tax.
In general, a seller has to register with each state separately. You see, our states are individual, sovereign governmental bodies. Each state has its own sales tax laws and rules and its own registration process. This can create confusion for many international sellers since the different state agencies that a seller needs to register with may be called by different names. For instance, in some states, the agency that a seller registers with is called the Department of Revenue, in other states the agency is called the Department of Taxation, and yet in other states, the agency could be called something entirely different (for instance in California, a seller would register with the Board of Equalization and in Texas, a seller would register with the Comptroller of Public Accounts).
2. Does an international seller need to form or incorporate a business entity in the U.S. in order to register with the various states?
Often I’m asked whether an international seller must form or incorporate in the U.S. in order to register with the various states. The answer is "no" - forming a U.S. entity is not required. However, although a non-U.S. entity can register for a sales tax permit, there are often special steps that must be taken. For instance, almost every state requires the registering entity to have a Federal Employer Identification Number (often referred to as an FEIN or an EIN) issued by the U.S. Internal Revenue Service (IRS). Note that I’ll be writing a much more detailed post explaining what an EIN is and how to apply for one, as well as explaining other Taxpayer Identification Numbers and when they are required. What’s important for this post is to know that an international seller does not have to form or create a U.S. entity to register for sales tax collection purposes. However, if the foreign entity does not have an EIN it will be difficult to apply for a sales tax permit as most states require this number.
3. Is there anything else an international seller should know about registering?
Once again, an international seller must register with each state separately if they have nexus in a state. Registration is often accomplished through the state's online registration system. However, the online registration system in some states is not available to international sellers. Even though U.S. sellers can easily access these online systems and enter all the required information, in order for an international seller to use these same online registration systems, the international must generally meet all of the following requirements. The seller must have: 1) an IRS issued EIN, 2) a U.S. address, and, 3) an officer or owner with a U.S. Social Security Number or an IRS issued Individual Taxpayer Identification Number (ITIN). While an international seller can apply for and obtain an EIN , if the international seller’s only address is in their home country and/or the officers or owners of the registering entity are all non-U.S. nationals (citizens of their home country), then the foreign entity must generally complete and submit a paper registration form. Often other documents are also required - for instance, if the officers/owners are non-U.S. citizens, a copy of the officer’s/owner’s foreign passport may be required in order to process the registration application.
Selling goods to customers in the U.S. can present an obligation to register, collect and remit sales tax on sales to customers in states where an international seller has nexus (such as where their inventory is warehoused and fulfilled from). In the context of sales tax obligations, we use the term “registering” to mean applying for a tax permit. A seller cannot collect sales tax until the seller is properly registered with the state for which they are collecting tax. International sellers must consider the need to obtain an IRS issued EIN (as most states will not process a sales tax registration if the registering entity does not have an EIN) and the need to apply by submitting a paper registration form. This is a complex process – and there is certainly much more to know. I’ll be covering other aspects of these topics in more detail in future posts. In the meantime, if you have questions or comments please feel to post them below.
Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:
- U.S. Sales Taxes: Filing Frequency for International Sellers
- 7 Key Points Foreign Sellers Should Know about U.S. State Taxes
- Do International Sellers Registering for Sales Tax Need a U.S. EIN?
- International Sellers and U.S. Sales Tax Registration: 3 Key Issues
- U.S. Sales Tax for Amazon FBA International Sellers