If you’re a Canadian SaaS or Technology company selling to US customers, you may have heard about economic nexus, essentially a way for state governments to capitalize on foreign businesses selling to customers residing in their state. If you charge Canadian sales tax (GST/HST) to your current customers, you may think that while another sales tax isn’t what you need on your plate right now, it can’t be that difficult…
Unfortunately, the US sales tax system is far more complicated than its Canadian counterpart with ever-changing laws, heftier fines for non-compliance and state-specific rules. That said, here’s a high-level overview of what you need to do in order to register and pay your US sales tax:
1) Determine if you’re on the hook for US sales tax
If you have an office, employees, contractors or a warehouse in a state, you may be considered to have a physical presence there, even if you don’t have any customers in that state. If you do have a physical presence there, you may be considered to have nexus in that state.
If you sell to customers in a given state, you may be considered to have economic nexus there. As a point of reference, many states consider you to have economic nexus when you’ve sold either $100,000 in products/services or have had 200 transactions.
Assuming you have nexus in a state, now what?
Some states tax certain types of software and some don’t. It’s as complicated and frustrating as it sounds. Effectively you have to read and interpret the sales tax guidelines of a particular state to determine whether you need to charge sales tax there (check out this post here for more information). Oh – and the laws can change so you’ll need to stay on top of them constantly if you want to stay compliant.
2) Registering for US sales tax permits
Once you determine that you have nexus and your product is taxable in a particular state, you’ll need to get a permit to collect and remit sales tax. To get a permit, you’ll first need to register your business with a US EIN (Employer Identification Number) which you can do via the IRS or an external service provider. With your EIN you’ll then need to complete the individual registration forms which can vary per state.
3) Collecting US sales tax
Much like Canadian GST/HST, US sales tax is collected from the customer then paid to the tax authorities. However, unlike GST/HST whose rates differ by province, US sales tax differs by region or municipality and so one state could have many different (and changing) sales tax rates depending on the location of the customer within that state. For that reason, most businesses should use US sales tax software to calculate the appropriate rate depending on the billing address of the customer.
4) Paying US sales tax
Assuming you’ve correctly collected your US sales tax from your customers, you’ll need to complete your sales tax filings and submit the payment to each state in which you’ve registered. Most states require an ACH transfer and you’ll likely need a US bank account to facilitate the payment of your taxes. Keep in mind that sales tax returns need to be prepared, filed and paid either monthly, quarterly or annually depending on a number of factors so chances are you’ll be filing a whole bunch of returns throughout the year!
Given the complexity of the US sales tax landscape, you may be better off using an external US sales tax management service so make sure to check out your options before navigating the process on your own.
Thanks to our friends at TaxValet who helped us with this post!