Sales tax in the United States

Canadians conducting business in the United States must be aware of potential sales tax responsibilities. In addition to Federal and State income taxes, businesses in the US may be required to collect and remit sales taxes to State or Municipal governments.

What do I need to know about Sales Tax in the United States?

Sales Tax

Sales tax in the United States is generally levied by the States. If your business sells products or provides services to people within your State, you may be required to collect sales taxes as required. Currently 45 States impose a general sales tax. The five states without general sales taxes are: Alaska, Delaware, Montana, New Hampshire and Oregon. Exactly which products and services are taxed and the specific tax rates vary from one State to another and even from one city to another. Check with your local tax authorities to find out whether the services you offer are subject to sales tax.

What is Nexus?

Whether your business is required to charge sales tax is determined by ‘Nexus’. Nexus is a term used to defined substantial physical presence within a State. A nexus is created if your company maintains a temporary or permanent presence of people (employees, service people or agents) or property (inventory, offices, warehouses). If your business has established Nexus (substantial presence) the state has the right to require a company to pay or collect and remit certain taxes. Once Nexus is established you must obtain a sales tax license from the State in which you conduct business.

Do I have to charge sales tax on out-of-state sales?

Unless you have Nexus in the State you are selling to, you are not required to charge sales tax in that State. However, it is common for business to voluntarily collect the tax as a convenience to their customers. If you do not charge tax on sales to another State, the customer will have to pay a Use Tax.

Sales Tax vs Use Tax

Sales tax in the United States is generally imposed on sales of goods and services to end-customers. So goods purchased for resale or manufacture is exempt from sales tax. Use tax applies to consumers who purchase from out-of-state vendors who do not collect tax on their sales. The sales tax and the use tax are “mutually exclusive”, which means either sales tax or use tax applies to a single transaction, but not both

Sales Tax Return

Every business with a sales tax license is required to file a sales tax return; even if you made no sales during your reporting period. However, you may be able to request less frequent filings from your State. We strongly recommend you contact your State or local tax authorities about information on how often to submit tax collections and where to send them.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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