Sam Suechting
Head of Product Operations at Commenda
Dec 24, 2024
|
5
min
Expanding your business across borders opens up vast opportunities but also presents a unique set of challenges, especially when it comes to managing sales tax compliance.
For cross-border businesses operating in the United States, navigating the complex and constantly changing sales tax landscape can be overwhelming. Sales tax obligations differ from state to state, and keeping up with these differences is essential to avoid hefty fines and penalties.
In this article, we will explore the top sales tax challenges for cross-border businesses operating in the US, including nexus, state-specific rules, product taxability, and how leveraging the right technology can help streamline compliance.
10 Sales Tax Challenges for Cross-Border Businesses
Nexus Challenges: Understanding the Legal Threshold for Sales Tax Collection
Nexus is a critical concept in US sales tax law, defining the connection a business must have with a state before it is required to collect and remit sales tax. With varying laws across states, determining nexus can be tricky, particularly for businesses selling across state lines.
Physical Nexus: A business is required to collect sales tax if it has a physical presence in a state, such as an office, warehouse, or employees. For instance, if your business operates in California, any physical presence—no matter how small—would trigger nexus, obligating the business to collect California sales tax on in-state sales.
Economic Nexus: After the 2018 South Dakota v. Wayfair Supreme Court ruling, states can now enforce sales tax collection even for businesses without a physical presence, based on economic activity. South Dakota requires out-of-state sellers to collect sales tax if they surpass $100,000 in sales or 200 transactions. Similarly, Texas and Florida have set similar thresholds, which means an online retailer based in Nevada would need to start collecting tax in Texas once it exceeds $500,000 in annual sales to Texas residents.
Example:
A New York-based online retailer selling to customers in North Carolina must collect sales tax if its sales exceed $100,000 annually in the state, triggering North Carolina's economic nexus rules.
Navigating State-Specific Sales Tax Rates and Rules
Every US state has its own sales tax rates and rules, and these can differ greatly from one region to another. This variation presents a challenge for businesses selling across multiple states, especially when managing different tax rates, exemptions, and filing deadlines.
State and Local Sales Tax Rates: Sales tax rates in the US vary not only by state but also by local jurisdictions. For example, California's base sales tax rate is 7.25%, but it can go as high as 10.25% in certain cities like Los Angeles, due to additional local taxes. On the other hand, Texas has a lower base rate of 6.25%, but this rate can also increase with local surtaxes.
Local Tax Variations: In cities like Chicago, the total sales tax rate can reach 10.25% due to local surtaxes. Similarly, in Colorado, the base rate of 2.9% can be adjusted with county and city-specific taxes, making it important to use the correct tax rate for each transaction.
Example:
A retail business selling in Chicago must calculate a 10.25% sales tax rate when selling goods in the city, whereas the same business selling in Rural Illinois would only apply 6.25%, demonstrating the need to account for local differences.
Product Taxability and Exemptions: State-Specific Rules on What is Taxed
A significant challenge for cross-border businesses is understanding the differences in product taxability across states. Some products are taxable in one state but exempt in another, or they may be subject to different rules entirely.
Exemptions for Certain Goods: Some states, like New Jersey and Massachusetts, offer exemptions on clothing and other specific categories of goods. However, California applies sales tax to nearly all tangible goods, including clothing, with very few exceptions.
Taxability of Services: In states like Texas, services related to tangible personal property are taxed, but in Florida, similar services may be exempt. Furthermore, services such as digital advertising and consulting may be taxable in certain states but exempt in others.
Example:
A clothing retailer operating in New Jersey does not need to charge sales tax on most clothing sales, but if the same retailer expands into California, they will be required to charge sales tax on all clothing items, regardless of whether the customer is purchasing in-store or online.
Handling Use Tax and Retail Delivery Charges
Use tax is a critical but often overlooked aspect of cross-border sales tax compliance. Use tax is applied when goods are purchased from out-of-state sellers and used within the purchaser's home state. Additionally, businesses need to stay informed on retail delivery charges, which may be subject to tax in some states.
Use Tax Obligations: If a business purchases goods from a state where no sales tax is charged, it may still be responsible for paying use tax in the state where the goods are used. For example, a business based in Florida that buys products from an out-of-state vendor in Texas may need to report and pay Florida use tax on those goods.
Retail Delivery Charges: States like New York tax delivery charges if they are part of the taxable sale, while others, such as California, may exempt certain types of shipping fees from sales tax, depending on how the charges are presented.
Example:
A Texas-based company buys inventory from a Georgia supplier and ships it to a warehouse in California. The business must report and pay California use tax on the inventory when it is used or sold in California.
Keeping Up with Dynamic Sales Tax Laws
One of the biggest challenges in cross-border business is keeping track of the constantly changing sales tax laws across multiple jurisdictions. Tax rates, deadlines, and rules evolve frequently, often without much notice.
Changing Tax Rates and Deadlines: According to the Tax Foundation, US states frequently update their sales tax rates and compliance deadlines. For example, Illinois revised its sales tax laws in 2022, introducing changes to the taxability of digital products and services.
Penalties for Non-Compliance: States like California impose steep penalties for failure to remit sales tax on time, and interest rates for overdue payments can reach up to 8% per year. Businesses that fail to keep track of such changes could face significant penalties, which can severely impact their profitability.
Example:
A North Carolina-based business selling to customers in Washington must comply with Washington’s unique tax deadlines and product classifications. If the business fails to file on time, it may face Washington's 9% late penalty on overdue taxes.
Dealing with Voluntary Disclosure Agreements (VDAs)
If a business finds it has not been collecting sales tax in a state where it should have been, a Voluntary Disclosure Agreement (VDA) can help resolve past non-compliance. VDAs often come with reduced penalties and interest if businesses self-report their errors.
Understanding and Reporting Use Tax
When purchasing goods from out-of-state vendors, businesses may be liable for use tax in their home state. Use tax ensures that sales tax is paid on goods bought without sales tax, such as online purchases from other states.
Use Tax: Paid when goods are bought in one state and used or stored in another state.
Example: A Florida business purchasing products from Texas will need to report and pay use tax in Florida.
Managing Retail Delivery Fees and Shipping Charges
Certain states apply sales tax to shipping charges, while others exempt these fees depending on how they are structured. Businesses must be mindful of how shipping charges are presented to avoid non-compliance.
Shipping and Delivery Fees: In states like New York, shipping fees may be taxable if they are part of a taxable sale.
Tackling Sales Tax Audits and Penalties
Sales tax audits can be a significant headache for businesses. To minimize the risks, businesses should keep detailed records and ensure compliance with state and federal tax laws. Penalties for non-compliance can be substantial, ranging from fines to interest charges.
Audit Risk: Audits can be triggered by late filings, inaccurate returns, or discrepancies between sales and tax remittances.
Penalties: States like California impose late penalties and interest, which can significantly impact profits.
Leveraging Technology to Simplify Sales Tax Compliance
Navigating complex and ever-changing sales tax laws can be overwhelming, but technology offers a powerful solution. Automated tax solutions like Commenda can simplify compliance by tracking and calculating tax rates, handling filings, and ensuring businesses meet their obligations.
Automated Tax Calculations: Tax automation tools ensure accurate calculations across multiple jurisdictions, reducing human error.
Tax Alerts: Stay ahead of regulatory changes with alerts on tax rate changes and filing deadlines.
Why Cross-Border Businesses Need Commenda Sales Tax and Dodo Payments
Commenda
Commenda complements the payment solutions offered by Dodo Payments by providing a comprehensive financial framework designed for businesses dealing with cross-border operations and diverse tax environments. Key features include:
Sales Tax Compliance: Commenda’s platform ensures that businesses can accurately track, calculate, and file sales tax according to state-specific and country-specific regulations. This is particularly important for businesses operating in the US, where tax rates and rules vary widely from state to state. By automating these processes, Commenda helps businesses avoid costly penalties and reduces the risk of errors in tax filings.
Entity Management Solutions: When expanding globally, businesses often need to manage multiple legal entities in different countries. Commenda simplifies this process by offering entity management tools that ensure businesses remain compliant with local laws, tax requirements, and reporting obligations. This is essential for companies that are scaling internationally and need to stay organized across various regions.
Custom Compliance Calendars: With constantly changing tax laws, businesses need a way to stay ahead of regulatory deadlines. Commenda provides customized compliance calendars that alert businesses to upcoming tax deadlines, regulatory filings, and other critical tasks. This helps businesses stay organized, avoid missed deadlines, and remain compliant with ease.
Commenda provides cross-border businesses with the clarity and strategic insight they need to navigate complex compliance challenges. With a strong focus on tax accuracy and entity management, Commenda ensures that businesses can scale smoothly while minimizing operational risks.
Dodo Payments
Dodo Payments specializes in simplifying global payment processes for businesses operating across borders, making it an ideal choice for companies in the e-commerce, SaaS, and retail sectors. Its features are particularly beneficial for cross-border businesses navigating complex sales tax and payment regulations:
Recurring Billing Management: Dodo Payments automates subscription and recurring billing, ensuring timely payments while reducing churn. This is especially useful for businesses with international customers who need to manage multiple currencies and tax rates, ensuring a smooth and predictable revenue stream.
Localized Payment Methods: With the ability to support various regional payment methods, including SEPA for Europe, UPI for India, and NETS in Singapore, Dodo Payments adapts to the payment preferences of local customers. This helps businesses improve their conversion rates, avoid cart abandonment, and increase customer satisfaction by offering payment options tailored to local markets.
Tax and Compliance Automation: Handling cross-border sales tax can be complex, with different tax laws and filing deadlines across states and countries. Dodo Payments simplifies the process by automatically calculating and managing VAT, GST, sales tax, and other local tax obligations. This reduces the administrative burden, minimizes the risk of compliance violations, and ensures timely filings in multiple jurisdictions.
By utilizing Dodo Payments, businesses can streamline their payment processing and tax compliance, allowing them to focus on growth, product innovation, and customer engagement without being bogged down by operational complexities.
Conclusion
Managing sales tax compliance across borders is a complex challenge, but with the right tools, businesses can simplify the process. By leveraging advanced tax automation technology, companies can easily navigate issues like nexus, state-specific rules, and evolving tax laws.
Commenda helps businesses streamline their sales tax processes, automating compliance across multiple jurisdictions. This reduces manual effort, mitigates risks, and ensures businesses stay on track as they expand. With Commenda, you can focus on growth while staying compliant and avoiding costly penalties.
