Good news: you are generating sales in the US and are sending the first invoices.
BUT, are you applying the right sales tax? Are you adapting it based on the state the sales are shipped to and the type of product you are selling: hardware, licensing (recurring revenues), professionals services, maintenance, etc.?
For example, how does sales tax apply to computer software and related services ?
US Sales Tax is a complicated topic especially for local subsidiaries of overseas companies starting their business in the US.
The Sales Tax is the tax amount defined by the state where the product is shipped to. It is collected by the company selling to the end user and paid to the state. The United States have fifty (50) states and five (5) territories, each with different rules and regulation for Sales Tax. Below is the summary of a few facts about Sales Tax:
Tangible vs. non-tangible
Generally, tangible or physical products/goods are subject to sales tax. Services are generally non-tangible therefore not taxable, with few exceptions.
💡 Let’s zoom on Computer software case
(” Prewritten Computer Software VS Customer software”)
Look at how fun & simple this topic is in the last report of the NY State Department of Taxation & Finance
In other words:
🚨 “Off-the-shelf” software (e.g., Slack is taxable) : any computer software that is not designed and developed to the specifications of a particular purchaser.
🚨 Customized software is not subject to tax.: is a type of software that may need modification or adjustment per client’s specifics.
💡 SAAS (service as a software) maybe subject to sales tax depending on the state and the type of services.
Many services related to computer software are exempt, such as the professional services, training, consulting, maintaining, etc.
HOWEVER, when these otherwise exempt services are provided in conjunction with the sale of prewritten software, the charge for the service is exempt from tax only when the charge for the service is reasonable and separately stated on the invoice or billing statement given to the customer.
🙏🏼 TIPS: Double-check with your Lawyer or Tax Services Firm before to bill!
Delivery vs. billing location
Sales Tax is applied by the state where the goods/products are delivered and not by the state where the buyer is billed.
Among 50 US states, five are sales tax-free including: Alaska, Montana, New Hampshire, Delaware and Oregon. – Other states may have different rules, rates.
Tax rates varies from a state to another. They are also subject to change: some states, including CA, the sales tax varies per the state’s county.
Also some state may change their rates from time to time.
End-user vs. re-seller
Sales tax only applies if the goods are sold and delivered to an end-user in a taxable state.
If the buyer is going to buy the product as an OEM part and use it in its final product, the seller product is not subject to sales tax.
Sales tax does not apply when selling to a re-seller. The re-seller must however provide a “resales/re-seller certificate”.
Government and Academia
Sales to US government entities are tax free.
Sales to Academia are tax free in most of the cases, which requires verification with the seller.
If you start selling in the US, you should absolutely know the logic behind Sales Tax. If you need help for your onboarding, just contact us for a free mentoring session. We could introduce to you our friends from KVB Partners, whose the sales Tax is no longer a secret 🙂
🚀 MAKE THE U.S. YOUR GROWTH PLAYFIELD 🇺🇸