Understanding U.S. sales tax isn’t always easy for international or foreign (non-U.S.) eCommerce sellers. There is much to understand, such as what sales tax is, what the different sales tax terms mean, how sales tax is calculated but most importantly, what sales tax responsibilities an international or foreign seller that sells to U.S. customers may have. I often say that sales tax is confusing for U.S. eCommerce sellers – but it is even more confusing for out-of-country eCommerce sellers who are unfamiliar with U.S. sales tax.
If you’re following my U.S. Sales Tax for Foreign Sellers posts here at SalesTaxSupport.com, you may have noticed I try to address many of the types of questions and concerns foreign sellers have about U.S. sales tax, such as how using Amazon FBA creates sales tax obligations for foreign sellers, how U.S. sales tax compares to a VAT, why U.S. tax treaties do not prevent or protect foreign sellers from being subject to the various state sales tax laws, and what it means to “register for sales tax."
In my role as a U.S. tax advisor that works with Amazon FBA and eCommerce sellers from all over the world, I spend a lot time advising foreign sellers that are just starting to sell in the U.S. on everything they need to know about U.S. sales tax (and other U.S. taxes as well). And when a client asks me about a letter they received or for further guidance on a topic – well, I’m sure they would agree they generally receive a very comprehensive response to their question as I feel it is important that I not only advise them, but educate them as well.
Recently several of my foreign clients forwarded correspondence they received from the state of Florida informing them that their “filing frequency” would be changing in 2017. In addition to this, a question that I’m often asked by foreign sellers who wish to understand their sales tax obligations is “how often will I have to file sales tax returns” once I am registered for sales tax. So I thought it would be helpful to write a post on "filing frequency" - a topic that many foreign sellers find confusing.
What does "filing frequency" mean? Does it have something to do with how often I have to file sales tax returns? Yes, filing frequency is a U.S. sales tax term which means exactly what it sounds like - how frequently (or how often) a seller will be required to file a sales tax return with a state. Many foreign sellers that are just becoming familiar with U.S. sales tax automatically think they will be required to file a sales tax return every month in every state where they register. However, how often a state will require a foreign seller to file their sales tax return (and remit the sales tax due) can depend on several things, such as the seller’s estimate of sales to customers in the state, estimate of sales tax that will be collected, or some other factor.
How is filing frequency determined? In several states, when a seller submits an application to register for a sales tax permit or business license, the seller is required to provide an estimate of sales they anticipate they will make to customers in the state. Some registration applications may ask for a monthly estimate of sales, others may ask for an annual estimate of sales, and some applications may ask for more specific information, like an estimate of total and taxable sales. (For an online retailer, total sales and taxable sales will generally be the same since all, or almost all, of an online retailer’s sales will be to final consumers and taxable.) While some registration applications may ask for a specific amount to be provided, other may ask the registering seller to checking off a box to show a range of estimated sales. Some state applications will ask for an estimate of the tax the registering company will owe to the state instead of an estimate of sales. Even though the different states will ask for different information (monthly or annual sales, a range of sales, taxes expected to be owned to the state), the important think to know is that this information is used by the states to determine how often the registering business should file and pay their taxes. In other words, the states use this information to determine the registering company's "filing frequency." I should note that there are some states that do not ask for an estimate of sales or tax on their application. These states tend to assign all sellers the same filing frequency.
What happens if my estimate of sales or tax is not correct? Another question I’m often asked is what happens if the estimate provided on the registration application is substantially different from the seller’s actual sales to customers in that state. Very often a new seller does not know what their sales to customers in that state will be – so all they are able to provide on the application is an estimate. While it is important to try to determine a reasonable estimate (for instance, if you’re an online retailer whose is already making sales of $5 Million a year, it would not be reasonable to say your estimated sales to a state will be only $100 per month) this estimate is simply used by the states to determine the seller’s initial filing frequency. Once the seller has been reporting their sales and paying taxes to the state for a while (a few months, a year), the state will adjust the seller’s filing frequency based on actual sales and taxes and will send a letter to the seller notifying them of the filing frequency change. I mentioned earlier in my post that several of my foreign clients had recently received notifications from Florida of a "filing frequency" change. They were initially on a quarterly filing frequency but because their actual Florida sales and taxes have exceeded a certain amount, Florida has switched their filing frequency from quarterly to monthly.
What are the different types of filing frequencies? A seller may be required to file their sales tax return monthly, quarterly, annually or semi-annually (twice per year). Note that the taxes due to the state are due when filing – so a seller who is filing on a monthly basis is also required to remit (pay) their taxes to the state monthly. One additional, but less common, filing frequency is what is referred to as a "quarterly prepayment" schedule. Sellers who are on a quarterly prepayment schedule file their sales tax return once a quarter, however, they are required to make a prepayment of the quarterly tax in each of the first two months of the quarter. Another question I’m often asked is whether the seller can ask or petition the state for a filing frequency of their choice. In general, that cannot be done especially for an online retailer. This is because sales tax is what we call a “trustee tax” – it is collected from customers by the online retailer and remitted (paid) to the state to which that tax belongs. An online retailer who is registered for sales tax in a state and has set-up their eCommerce site, platform or seller account to charge and collect sales tax from customers is holding the taxes collected in “trust” for the state. That's right - the tax does not belong to the seller, it belongs to the state and the seller is simply collecting the tax and giving it to state. The more sales tax a seller is collecting on behalf of the state, the more often the state will require that online retailer to remit the tax collections to the state.
As you can see, there really is a lot to know when it comes to U.S. sales tax. In this post, I’ve addressed one topic based on a very common question I receive - how often a foreign seller will be required to file and pay sales tax. I’ll be continuing this series with additional important and helpful topics. In prior posts I've addressed nexus for international Amazon FBA sellers, key sales tax registration issues and whether foreign sellers registering for sales tax need an EIN. If you have specific questions or topics you’d like to see covered, please feel free to post a comment below.
Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:
- Wayfair & Economic Nexus for Foreign Sellers: Key Sales Tax Questions
- 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