Tax – The One Pager: U.S. Sales Taxes

Louisiana currently levies the highest overall combined state and local sales tax at 9.56% and Alaska, Delaware, Montana, New Hampshire and Oregon do not impose sales tax. European market participants may also be required to collect and remit sales taxes if they have a so-called nexus (connection) to and conduct business in a U.S. state. Such business includes sales of tangible or intangible goods and the provision of services, such as software (license) agreements, leasing and other services.

Physical nexus

For European market participants to be subject to a state’s sales tax obligations a physical or economic presence in that state is required; such a physical nexus can be assumed in case of:

• use of a local physical place for business purposes, e.g. a warehouse, home office or permanent establishment,
• local personnel, e.g. staff, salesmen, independent contractors or local affiliates directing clients to a business, or
• maintaining local inventories, e.g. by use of third-party fulfilment services.

Economic nexus of remote companies

Since the U.S. Supreme Court's South Dakota v. Wayfair decision in 2018, the states can also levy sales taxes on companies without a physical nexus. Every state with a sales tax has enacted a version of an economic nexus law resulting in a complex patchwork of requirements, exemptions and thresholds throughout the U.S.

These rules apply if companies without any physical nexus to (any) state in the U.S. cross economic nexus thresholds. Such is assumed if a company reaches a specific volume of transactions or a revenue threshold in a particular state. In most states the threshold is 200 transactions or $ 100,000,00 in sales over a twelve-month period. However, each state and locality can set their own thresholds.

Key Take-Aways

This complex patchwork of requirements, exemptions and thresholds throughout the U.S. creates a potential issue for all companies selling to U.S. based customers, in particular, e‑commerce and software companies. Non‑compliance can, in particular, lead to administrative or criminal proceedings, reputational damage and issues in relation to tax indemnities or warranties in M&A context.

Our multinational tax team at Eversheds Sutherland can assist EU-based companies to determine whether they have sales tax filing and registration obligations or a duty to collect and remit sales taxes in the U.S. In addition, we can also assist in executing voluntary disclosure agreements with state taxing authorities that allow a company to pay back-taxes (e.g., for 2 ‑ 3 years) in exchange for the promise to adhere to its sales tax obligations moving forward.