Understanding U.S. Sales Tax for Global Businesses

Sam Suechting:
Hello everyone. We're just gonna give a moment for a few people to join. My name is Sam Suechting. I'm joined by my colleague Benj here. We're both calling in from Commenda's Seattle office. Today we'll be talking about sales tax 101 for international businesses expanding into the US. Please go ahead while we wait. Why don't you drop where you're calling in from? I think we have quite a few people joining from Australia and New Zealand today, and perhaps a few other locations as well. We'll wait just a minute and then we'll go ahead and get going. Throughout the course of the webinar, if you have any questions about certain topics or how certain topics might apply to your particular business, please feel free to drop those into the chat. We'd like to make this as interactive as possible. Obviously, compliance can be somewhat of a dry topic. So we wanna get into your situation if you'd like. Looks like we have one in Sydney, Australia.

Sam Suechting:
And you should be able to access the chat. There should be a chat icon where you can go ahead and drop your messages. There's also a QA section and a polls section. So we'll be running several interactive polls throughout the course of the webinar. So please feel free to post your responses to those and we'll make sure that we steer the webinar in such a way that it's you know most relevant to what you're looking to get out of it. Another one in Auckland, one in Singapore. Great. I think we'll go ahead and get started. I'm sure we'll have a few additional people join. But without further ado, my name is Sam Suechting, I'm head of product here at Commenda. Before I was leading product at Commenda, I spent quite a while working on our US sales tax solution. I know more about sales tax than I ever possibly thought I would. I think that's how many people end up in, you know, indirect tax. It's not something you really plan for. It sort of just falls into your lap. So Commenda has built an entire tax engine around sales tax and we have a very granular understanding of how it works, particularly as it applies to international businesses. Commenda's purpose built for global businesses. So almost all of our customers for our indirect tax products are coming from abroad and expanding into the US. So we're very aware of their unique compliance situation, which is a bit different than what you would see for a domestic company in the US. And we'll talk about why that is throughout the course of this webinar. Let's go ahead and get started, Benj. Can you advance? A little bit about Commenda. We don't just do global indirect tax, we also do tax and accounting. We offer a managed a marketplace of services around the world, and need management solutions and transfer pricing as well. I'm not here to make a hard sale on you though, so let's go ahead and get into the content.

Sam Suechting:
What will we cover today? So we're gonna cover the basics in the first few sections. What is a sales tax, who has to collect it, and who administers it. And then towards the end of the webinar, we'll talk about some of the more advanced concept, such as which rate applies, what's taxable, and how compliance actually works in practice. It's in this section that we'll start talking about the concept of product taxability, which is quite complicated in the US, and that's where we tend to see the most questions. So like I said before, if you have any questions about the topic or about how it applies to your particular business throughout the webinar, please feel free to put those questions in the chat. And we'll be sure to t take a moment to pause at the beginning or end of each section to ensure that all the questions are addressed.

Sam Suechting:
Great, we'll go ahead and do our full first poll. Where are you in your sales tax journey? You should see a pop-up on your screen where you're able to post your answer. So one, haven't entered the US market yet. Two, started selling but not sure about sales tax yet. Three, registered in some states and managing it manually, or finally four, you're fully registered and just here to learn more.

Benj Bidinger:
Alright, it looks like it's forty for haven't entered or started selling but not sure about sales tax. Some for fully registered here just to learn some more. Okay. Mixed bag.

Sam Suechting:
Great. All right, well we will cover all of those cases. All right, so section one, what is a sales tax? So there's sort of four key distinguishing features of a sales tax. It is a consumption tax, just like VAT and GST globally. It's paid by the end consumer of a good or service, but there is an obligation for sellers to collect it and to remit it on behalf of the government. Another thing to note is that sales tax is typically added to the sale price and then passed on to the state. So unlike VAT and GST systems globally, which typically use list prices that are tax inclusive, most list prices in the US are always gonna be tax exclusive and then the portion of tax will be added during checkout. So that's totally normal in the US. We do get quite a few questions from international sellers asking about, you know, what are invoicing requirements in the US and also will my buyer expect to see the tax added to their final bill? So the answer is yes, that's totally normal to have that amount added, and your buyer is not going to question you on that. That's just standard practice here. And then in terms of invoicing requirements, in the US, there essentially are none. Unlike we don't really have the concept of VAT or GST IDs that need to be included on invoices. So there's really no rules around how an invoice needs to be structured. You can use kind of common practices for invoices, and that's not regulated by any authority whatsoever. Secondly, sales taxes apply on the sale amount, not on profit. So if you're losing money on a sale, it's still going to be taxed. I already covered point three, it's typically added at checkout. And lastly, and most importantly, the sales tax rate depends on the location. And there are a lot of different jurisdictions in the US, all of which have their own tax rate. We'll talk about this topic in a lot of detail. Just to give you a sense of the scale of what this problem or system looks like in the US. Commenda's system currently has 44,000 sales tax jurisdictions in the US. Sometimes jurisdictions can be small as small as a single building and there might be unique rate associated with those. So depending upon the nature of what you're selling and the frequency of your sales, it can get very complex to make sure that these rates are applied correctly. And we'll talk about how to make sense of that as we continue.

Sam Suechting:
Great, so we'll do a quick comparison of sales tax versus VAT and GST systems. So sales tax is what we refer to as a single stage tax as opposed to VAT and GST, which are what we call multi-stage taxes. So when we say multi-stage, we mean that VAT and GST are typically applied at every stage in the supply chain, from manufacturer to retailer and from retailer to end consumer, or as many steps as there might be in that chain, right? In the US, it's only applied once, and that's to the final consumer of a good or service. So it's a single-stage tax as opposed to a multi-stage tax. In VAT and GST systems, we also see that there's a concept of input credits, and businesses can reclaim tax paid on inputs. There's no concept of input credits in the US. If you are making a sale for to a reset to a wholesaler, essentially, you can claim what's called an exemption certificate. In which case you're not obligated to collect tax on those sales. But that's due to the nature of the sale. And this is what we call the resale exemption. So if I'm a manufacturer and I'm selling to a res retailer, they will provide me with a resale exemption certificate. Therefore, the me as the wholesaler no longer has an obligation to collect tax from them. But I do want to keep that resale exemption certificate on file so that if I'm ever audited, I can and the auditor asks me, hey, why didn't you tax this transaction to this particular retailer? You can produce that certificate and demonstrate that. It was exempt for a resale purpose. And that is the extent of your documentation requirement in this kind of case. And lastly, we already talked a bit about pricing. Again, US sales taxes are almost always tax exclusive. A lot of this is downstream of the rate complexity. In most VAT and GST countries, there are only a handful of rates that apply nationally. There are thousands of rates in the US. So you want consistency on your profit margins. And if you're pricing it as tax inclusive in the US, you're gonna have a variable profit margin because that rate is gonna vary from jurisdiction to jurisdiction depending upon where your buyers are located. Okay, Bench. One sort of housekeeping item I want to point out is that there are a lot of different names that are used by states for sales taxes. So I have just a handful of examples that are pulled here.

Sam Suechting:
In Arizona, they refer to it as the transaction privilege tax. In Illinois, they call it the retailer's occupation tax. And then in New Mexico and Hawaii, they call it the gross receipts tax and the general excise tax. For all intents and purposes, these are all sales taxes, but it's something to be aware of as you're getting registered or navigating different state portals. You might see different terminology, and these are really just sales taxes. States have slightly different sort of legal conceptions for how these operate. But at the end of the day they're just sales taxes and that's how I'll refer to them throughout the remainder of this webinar. Okay, so who has to collect sales tax? Another quick poll. How many US states can create a sales tax obligation for you without any physical presence? Fewer than 10, 21, 32, or 45. Again, you should see a quick poll popping up on your screen, and you can go ahead and post your answer. So this is the number of states that have sales tax in the US. Obviously, there are 50 states in the US, but not all of them have a sales tax. So that's why we're posting this.

Benj Bidinger:
Looks like we got one for fewer than 10. It's 50-50 between fewer than 10 and 45. It's shifting back and forth a little bit. It looks pretty even. We got one for 21, one for 32, another mixed bag.

Sam Suechting:
All right, so the correct answer is four. Forty-five states have a sales tax in the US. There are a few exemptions. Those are what we call the Nomad states, which we'll talk a little bit about later. Nomad is sort of the industry acronym for New Mexico excuse me, New Hampshire, Oregon, Montana, Alaska, and Delaware. Those are the states that don't have a sales tax in the US. One thing I will note is that the District of Columbia, where our cap nation's capital is located, Does have a sales tax. So even though they're not a state, there is sales tax in Washington, D.C. So important to be aware of that. All right, let's keep going, Bench. Great, let's talk about Nexus. Nexus is a connection to a state that is strong enough that the state can require you to register, collect, and remit taxes. So even if you have no physical presence in a state, it you can have what's called an economic. Nexus, and this is where even if you don't have any sort of inventory or physical presence in a state, the state can still require you to register, collect, and remit taxes in that state. We'll talk about these two types in the next couple slides, but these are the two main categories of Nexus, physical nexus and economic nexus, and both of them create an obligation for you to go ahead and get registered. These are sort of cumulative, right? If you have either physical nexus or economic message nexus, you must get registered in the US. You don't need to have both. So we do get some confusion where sellers say, you know, I have a physical presence, but I haven't crossed the economic nexus threshold. Do I still have to get registered? The answer is yes. If you have any type of nexus, you must get registered, regardless of whether it's physical or economic. And we'll talk about what goes into these different thresholds and these different types as we continue.

Sam Suechting:
Okay, physical nexus, first up. This is sort of the anything on the ground rule in a state that can create nexus. There's broadly two categories of physical nexus, those that are established through a temporary presence and those that are established through a permanent presence. So the permanent presence is relatively straightforward, right? If you have an office, store, warehouse, distribution center, even a remote employee who's working from home potentially can establish a physical nexus in a state and therefore an obligation to get registered immediately. The trickier cases are those around temporary presence. So if you re are regularly doing in-person activity in a state, such as attending trade shows, doing client visits, or doing deliveries in company-owned vehicles, that can also establish physical nexus as well, even if you don't have you know a brick and mortar office or retail location in that state. So those are the important ones to be aware of. There are one sort of tricky set of state of triggers as well, and that is if you Still retain ownership of your inventory, but it's handled through a third party logistics provider. So this includes Amazon FBA or a 3PL that can still establish physical Nexus for you, even though you're not in control of your inventory. You've turned it over to a third party. The very fact that you own that inventory can establish Nexus, even though you're not in control of how they're distributing it, distributing it between their warehouses. So you should be aware of that. There is a one very famous case. Amazon was assessed, I believe, $269 million in penalties by the state of Texas because they claim not to have Nexus. But a one of Amazon's subsidiaries had a location in Texas and they basically went back to Amazon and assessed two hundred sixty-nine million dollars in penalties because they said they had physical Nexus and that created an obligation for them to get registered, even though you know the entity in question had no physical location. So important to get this right. And physical nexus is immediate, right? Unlike economic nexus, which has sort of a rolling evaluation period and different thresholds that you assess over time, physical nexus, as soon as you have it, requires you to get registered immediately. Let's go ahead, Bench.

Sam Suechting:
Great. Next we'll talk about economic nexus. This is a much newer concept. It only emerged in the wake of a Supreme Court case called South Dakota v Wayfair in 2018 that lets states create an obligation for sellers to get registered and begin tax collection, even if they have no physical presence within a state at all. This really happened in the wake of, you know, the growth of e commerce and to level the playing field between in state and out of state sellers. You can imagine if you're in one state, that doesn't charge sales tax and you have another one next door that does, the states in that the sellers in that state that does charge sales tax are going to be at a disadvantage relative to the businesses next door. And so, you know, states don't want to create an incentive for people to shop at a neighboring state as opposed to purchasing from in-state businesses. So this was an attempt to level the playing field and it's been around for about eight years now. So economic nexus has thresholds associated with it. Typically, this is gonna be $100,000 per year in most states, but there are gonna be states that have varying thresholds. The ones that come to mind are Texas, California, and New York. Those have a higher threshold of $500,000 in annual sales. So you do need to check on a state-by-state basis. And one other thing to note is that the evaluation periods can vary as well. So some states apply these thresholds on a rolling 12-month period, some do it based upon your current or previous financial year. Others do it the year ended September 30th, as in the case of Illinois. So it's important not only that you understand, you know, how many sales you're making over the course of, you know, your company's history, but also which states they're going to and also which is the relevant evaluation period rule to apply when you're making your Nexus determination. This gets tricky, right? I mean, there's forty-five states that have a sales tax. They all have their own threshold, they all have their own evaluation period. It is quite tedious to run this manually. So, this is when it can pay to have a solution like Commenda that will track this automatically by syncing in your sales from your online payments platform, accounting software, or ERP. And we'll send you an alert when it's time to go ahead and get registered. And getting registered proactively is really important, right? At the end of the day, like we covered in the first slide, sales tax is a consumption tax on the end consumer of a good or service, meaning your buyer. So if you don't get registered,

Sam Suechting:
It's gonna be very difficult for you to go back to your buyer after the sale has already been made and collect back taxes. So those taxes are effectively gonna come out of your pocket if you're not getting registered proactively. So we do recommend that you have a good practice around making sure that you're updating your Nexus studies. Hopefully you're using a software solution like Commenda, and that way you'll stay on top of your registrations before they come become a problem. So here's a map of the various thresholds by state. So you can see the dark blue ones have a threshold of five hundred thousand dollars, the light blue have a hundred thousand, and then you can see the NOVAD states have no sales tax so that they don't have any threshold either. So, what do you need to do once you establish Nexus, whether that's physical or economic? Of course, you need to go ahead and get registered. You need to do this online typically. It used to be done by paper. Nowadays you can almost always do it online in all states. You need to get a sales tax permit from the state's tax authority before you start tax collections. This is pretty quick in most states. You can do it within one, two, three business days. There will be a handful of states where the process is a bit slower. It might require up to a few weeks in order to receive a piece of physical mail before it's possible. But it is generally pretty seamless in comparison to what it used to be. Secondly, you need to start tax collection. And this is the part that I think is most often overlooked. Once you get registered, the state is gonna expect you to start filing returns immediately from your effective registration date. That means that you need to make sure that your tax collection process is set up ahead of time and integrated with your billing or invoicing system. So you're actually ready to start collections. Otherwise, you know, you're gonna be paying those taxes out of pocket if you get registered and you're not ready to begin the actual tax collection process. So it's very important to do those in tandem and make sure that you know the date of tax collection and enablement in your system actually coincides with your effective registration date. Point three here is if applicable, you need to manage exemption certificates. So this is typically most relevant to B2B sellers because you might be selling to a wholesaler. And they're going to provide you with resale exemption certificates. If that's the case, you need to store those in a structured way so that you can produce them in the event that you're ever audited. So it's important to get this right. And the number of exemptions can get pretty high. So I think Commenda's customer currently that has the highest number of exemptions is managing five to ten thousand. They're obviously a quite a large seller, but the reason that the numbers of exemption certificates could grow so high is because every state has its own exemption certificate. So if you're selling to a buyer, And they you're making sales to them in more than one state. You'll need to get an exemption certificate from them in all of their locations. And then certain exemption certificates also do have expiration dates. So you'll need to renew their exemption certificate before you raise your next invoice in the event that it's expired. Again, Commenda can assist with this. We can manage all your 5,000 exemption certificates. We can email your buyer a link in order to upload them so you don't have to do so manually. And then also, of course, we'll create a warning.

Sam Suechting:
When they're about to expire, so that you can make sure that you have no interruption in your billing or invoicing process. And lastly, you need to file and remit. So the filing process is typically done online these days. You can always use a solution like Commenda and we'll do this for you. You'll don't have to worry about it. And then for remittance, it's pretty straightforward. Typically, it's going to be an ACH poll from the state regulator directly from your bank account. An ACH is just a bank transfer, a domestic banks transfer in the US. So you do need to have a US bank account. If you have only have foreign accounts, that typically does not work to actually pay the tax owed to a regulator. Go ahead and pause there. Let's see if we have any questions. I don't see any so far. So let's go ahead and continue. But like I said earlier, feel free to put any questions you have into the chat about how that all these topics apply to your business. I'd be happy to answer them as we keep going. So next thing to discuss is marketplace facilitators. So every sales tax state now has what's called a marketplace facilitator law. Marketplace facilitators are companies like Amazon, eBay, Etsy, Walmart, even Shopify, and TikTok have an aspect of them that are now considered marketplace facilitators. What a marketplace facilitator means is that if you are making sales through one of these platforms, they have an obligation to collect on your behalf and you no longer have that obligation. So marketplace sales still count towards your nexus thresholds. If you're selling on Amazon, even though they have the obligation to collect on your behalf, you still have an obligation to get registered even though you're no longer doing the collection. So that's important to keep in mind. Next thing I would mention is that you might still have an obligation to file returns, but those sales made through marketplace facilitators are typically considered exempt on your return. So if I'm selling through a marketplace facilitator in a state, I still have an obligation to file that return, but it's gonna be zero dollars in tax owed because all the tax was collected by Amazon and that will be reported on the return.

Sam Suechting:
Let's go ahead, Bench. Great. So now we'll talk about who administers sales tax. And this is where the US diverges most significantly from most other VAT and GST systems globally. So unlike most VAT and GST systems, there is no national sales tax in the US. It's admitted administered entirely on a state-by-state basis. And more than that, it's on a jurisdiction by jurisdiction level as well. So at the beginning, you heard that there are over 44,000 sales tax jurisdictions in the US that we currently track in our system. Every single one has its own rate that gets supplied, and many of them have their own rules as well. So it can get incredibly complicated very quickly. It does there is some simplification if you are a remote or out of state seller, but there are a lot of jurisdictions to consider, and it's important that you're getting the rates right. That's where a system like Commenda can assist your business because doing all of this manually, you know, beyond a certain scale is almost impossible to do. And lastly, I did mention the nomad states already, but already, but those are New Hampshire, Oregon, Montana, Alaska, and Delaware. These are the states that have no state level sales tax. Although you will note there is an asterisk on Alaska. Although there is no state level sales tax in Alaska, there is local and municipal level sales taxes. So it's important to understand that caveat.

Sam Suechting:
As I mentioned, over 44,000 tax jurisdictions in the US. A state like Missouri, just as an example, has over 1,500 on its own. So, what all are all these jurisdictions, you might ask? So typically when I'm if I'm selling to a buyer, let's say in Kansas City, Missouri, I'm gonna have to pay a portion to the state. So that's one jurisdiction, a portion to the county, a portion to the city, and a portion to the municipality. So that's four jurisdictions already. Each of them have their own sliver of sales tax that they're gonna apply on an invoice. And then even beyond those four, you also have what we call special tax jurisdictions. So in a city like Kansas City, you might have a special tax jurisdiction to fund a fire district or to fund hospital or ambulance services. So you have these special districts that get layered on top of those sort of jurisdictional ones. And the blended rate, the combined rate, gets added up between all those jurisdictions. And that's the rate that needs to be applied onto the invoice that you're raising to your buyer. One question I've received before is. Do you need to break out the jurisdiction by jurisdiction rates on an invoice? The answer is no. It's fine just to apply a blended rate. So you don't need five line items, one for each jurisdiction. You can just put the aggregate rate on your invoice, and that's totally sufficient. What does matter is when you're actually filing your return, that you're allocating the tax correctly among those jurisdictions. And typically the portal can assist you with this, but there is a little bit of math that needs to be done to make sure that this process is seamless. So that's important to keep in mind.

Benj Bidinger:
It looks like there is a question in the chat. So if I'm a overseas seller without a presence in the US and sell to a distributor in the US, I still need to consider US sales tax even though the distributor is not the end customer? If so, does yeah, go.

Sam Suechting:
Okay. So it if the if the distributor is purchasing your goods at wholesale, they will provide you what's called a resale exemption certificate. So they're not the end consumer. No tax needs to be collected on that transaction, but you have a requirement to keep the documentation on file. So you should request a resale exemption certificate from your distributor, keep that on file, and that is your the end of your obligation. Please let me know if you have any follow up question to that. Happy to take it. If so, does it still stand if the distributor is a related group company? Yes, you still need to have the paperwork on file. And then the obligation then is gonna be on that distributor entity in to do the tax collection if they are making sales to the end consumer.

Sam Suechting:
Okay, section four. We're gonna talk about what rates apply when you're making sales. So these are some more legal concepts in terms of how sales tax is actually put together in practice in the US. So first we're gonna talk about sales tax versus seller's use tax. So this is where we distinguish between intrastate and interstate sales. So on the left box, we have an example of an intrastate sale, meaning the buyer and the seller are located in the same state, in this case in Arizona. This is what we call a classic sales tax. Separately, we have a concept of a seller's use tax. This is when the seller is located in one state and the buyer is located in another state. In this case, the seller is located in Sacramento and the buyer's located in Phoenix, Arizona. This is a seller's use tax. The type of sale you're making can change the type of sales tax permit or license that you're going to apply for. If you are an out-of-state or out-of-country seller, seller's use tax is the right type for you. Go ahead, Bench. The next concept that we'll discuss is origin versus destination-based sourcing. So I believe there are 11 states that use origin, no, excuse me, 12 states that use origin-based sourcing, and the remainder of the states use what's called destination-based sourcing. So, what does this actually mean? Origin versus destination determines which rate needs to be applied on the invoice based upon the location of the buyer or the seller. So if I'm a seller located in Reno, And my buyer's located in Las Vegas. This is a destination-based state. Therefore, I'm going to use the rate in Las Vegas, the location of my buyer. In an origin-based state, if I'm a seller located in Chicago and I'm making a sale to a buyer in Springfield, Illinois, they're both in the state of Illinois. In this case, the origin is going to be used to determine the rate. So this in this example, the rate is going to be determined by the location of the seller in Chicago. So it's important that you are entering these addresses correctly on your invoice. That way we can determine the appropriate tax to apply based upon the location of the buyer or the seller. If you're selling from outside of the country, everything is going to be destination-based for you. So you only need to worry about the first case. And the most important address to include will be that of your buyer.

Sam Suechting:
I'm an overseas seller selling via Shopify. Do I need to register for sales tax? But Lodge as nil as Shopify could collect on our behalf. There's a few different versions of Shopify. So Shopify has a marketplace facilitator component to it. If you're selling through that, then they will do collect on your behalf. But you still need to keep track of your Nexus thresholds and get registered if you cross them and then file a nil return. If you were just hosting a typical e-commerce site, those are typically not included within the marketplace facilitator portion of Shopify, and you will still have an obligation to collect tax on those sales. So it Shopify is one of the confusing ones where either scenario could can apply. And it's really important that you understand which one applies in your case. So look at your Shopify setup and make sure that if you are selling through the marketplace facilitator, that's fine. But if you're not, then you will have an obligation to get registered and start tax collection.

Sam Suechting:
Can you generally integrate Shopify to your sales tax software? Yes, of course. Commenda does this out of the box as well. You can directly integrate Commenda to Shopify. All of your Shopify sales will flow directly into your Shopify into your Commenda dashboard, and then our team will go ahead and process your tax returns on your behalf. It's a pretty quick setup. It only takes, I mean, truly about 10 minutes to establish that connection. Okay, this is probably the most fun section. We're gonna talk about what's taxable in the US, and this gets extraordinarily complicated. Let's go ahead, Bench. Okay, here's a fun one. Another poll. In New York, a bagel is taxed differently depending upon whether it's sliced. True or false? Should see it pop up on your screen.

Sam Suechting:
Ninety ten. Well, then 90% of you are right. This is true in the state of New York. So in New York, if you sell the bagel and it's unsliced, that is what we call tangible personal property or TPP. It's a food item and it's sold for end consumer use, right? If it's sliced, that then is a restaurant service essentially. So in one case it's a physical product, in the other case it's a service, it's food preparation. And those have entirely different tax treatments in the state of New York. There are Many, many thousands of examples of nuances like this in the sales tax world. I think there's a couple on the next slide if you want to go ahead, Benj. An infamous one in the state of Florida is the tax treatment of cleaning the inside of a window versus the outside of a window. So for example, if you clean the inside of a window, it's considered a janitorial service. If you clean the outside, it's considered custodial. And those have different tax treatments in the state of New York as well. Another one would be the difference between a carpet and a rug. One is a manufacturing product, the other is a consumable good that a retailer, a retail consumer would buy. And those have different tax treatments as well. There's many, many examples of this. This is probably the most important thing to get right when you are setting up your tax collection process is to understand the specific taxability of the products or services you sell. Because this is what creates you know the most variance in your potential liability. If you get it wrong, the state can come after you for back taxes if you, you know, said something was exempt and they, you know. State otherwise essentially. So it's important to get this determination correct. There are two broad categories within this questi question of taxability. The first on the left is products and the one on the right is services. So almost all physical products in the US are taxable. This is again what we refer to as tangible personal property, tech typically taxable by default in all states. There will be s ex certain explicit carve-outs for certain types of goods like groceries, medicine, food

Sam Suechting:
Thing of things of that nature typically have some kind of exemption, a reduced rate applied to them. But if you're just sell sending selling normal consumables, phone cases, clothes, things of that nature, then those are almost always taxable by default. It's pretty straightforward. Services is where it gets much more complicated. Some states take a very broad interpretation and they tax both products and services. Other states have a narrower interpretation of what's taxable and they tax only products. So it's going to vary state by state whether services are taxed. And then there's a question of what a service actually is. And we'll talk about that on the next slide. So services is where we get some complexity. They can be exempt, they often are exempt, but it's important that you understand the frameworks around what is or isn't taxable. So, how do regulators actually decide all this? They apply a few different frameworks that we have laid out here. The first one is what we call the true object test. What is the buyer really paying for? Tax follows the answer, not the delivery format. So The example we have here is custom software on a USB drive. The true object of the sale is the developer's service, not the USB drive itself. So even though there's a physical object involved, this is not considered tangible personal property. This is the sale of a service, and it's typically going to be exempt in most states. So the true object sets, what are we actually selling? Very important to determine that. Number two here is we have incidental to service test. If the tangible item is incidental to a service, the whole charge is an exempt service. Example, a consultant's printed report. The paper is incidental, the in the analysis is the sale. Another example would be a photography service, right? If I hire a professional photographer to take my photo and they give me a physical photo at the end, I'm not purchasing that photo as tangible personal property. I'm purchasing the service of photography and the photo is just incidental. Where these types of definitions can get really difficult to ascertain is in SAS. Software and data processing. So you know we had one client at Commenda that offered an online AI service, but they also offered an installable app as part of it. The question was that installable app does that qualify as tangible personal property or is that incidental to the data processing that's happening in the cloud? So this is a kind of a classic case around data processing.

Sam Suechting:
And there are a lot of other cases in the software world where if you are installing something, it can obvious it can often qualify as tangible personal property. Just like you used to sell software on CD-ROMs, that was considered tangible personal property. Whereas when it's in the cloud, that's considered data processing. And there's a lot of different nuance around what is or isn't taxable when we're talking about software, software as a service, and all these types of cloud services and data processing. So those get pretty nuanced. Point three here is the bundled transaction rule. This is the most important one. And has the most implications for how you set up your invoicing process. So one price for taxable and non-taxable items usually makes the entire bundle taxable. So the example here is if you're selling software as a service with an onboarding fee and a support fee, many states will tax the entire amount on the invoice unless the items are broken out separately. So the you know, one example is we had a customer based in the UK. They sold you know high-end home goods and they often had a design fee that was bundled with that high end good that would be shipped to the customer in the US so this is what we call sort of a tainted transaction even though a portion of that sale the service the design service is typically going to be exempt in almost all states because they were grouping those into a single line item on the invoice most states will treat the entire sale as taxable. So if you want to save your And buyer a little bit of tax money, you'll need to break those out separately. Otherwise, you need to treat the entire invoice as taxable. So very important to understand that as you're setting up your invoicing process for tax collection. Lastly, we have the primary function test. For mixed digital services, states ask what the service primarily does and tax it under that category. So in Texas, Texas taxes data processing, a platform whose primary function is processing customer data is taxable. And so this is a especially the example I was mentioning just a moment ago. And then Texas also layers an additional rate change here as well where they reduce the tax base. So if you're selling SaaS into Texas and you're selling $100 of s of SaaS, you treat it as though it's an $80 sale because they only tax 80% of the basis in the state of Texas. So that's a little bit of a separate concept, but there is some unique rules like that and Texas is an example of it.

Sam Suechting:
We see do we have question? Okay, where does Commenda handle the nuances for product or service with your clients by tax jurisdictions? Do you help navigate this? Is it built into the platform, et cetera? Yes. So Commenda has an entire research team of experts that go state by state and research the specific taxability rules that they have. And what we do is we take all those rules and we essentially put them into a library of what we call Commenda tax codes. So those are things like digital services, cloud service, B2B, SaaS, or T PP clothing Children's clothes or TPP, health and beauty, wellness device, blood sensor, things like that. They're very specific tax codes. Our research team will for each of those tax codes goes to every state, understands how they tax it, and then we apply all that logic for you so you don't have to think about it. So all you need to do is we'll import your product catalog. We'll typically set up an integration with your ERP accounting or billing system, we'll bring your entire catalog into our system. We will then assign the tax codes to your product catalog. That way, the next time you raise an invoice, we will look at all the line items on the invoice. We will look at the line items, excuse me, the products associated with those line items, and then we will make a determination about whether or not they need to be taxed, taxable, or exempt. So it's really quite simple because that way the person who's typically setting up this compliance system is not always the person who's actually raising the invoice. That's typically going to be someone on the sales team.

Sam Suechting:
S your sales team member never has to come into Commenda. They can stay in whatever accounting software or online checkout system they're using, and that logic will be entirely taken care of automatically by Commenda. They don't have to worry about, you know, whether there's some special taxability rule that applies or not. Commenda will take care of that for you. Let's go ahead, bench. Okay, the test applied, software and cloud. The same offering can be a taxable product in one state and an exempt service next door. So we have a few different examples here for software, because this is typically the most common and complicated case. We're talking about pre-written software, meaning we're not writing custom software that we're selling to an end user. This is taxed like a product in most states, whether on a disk or by download. This is a service. Because you're not selling something that's repeatedly across your customer face. And this is the true object framework at work, right? You're buying the service of custom software development. You're not buying a pre-written software item, so to speak. Third, we have SaaS and Cloud. States typically split it down the middle. So New York, Texas, Pennsylvania, and Washington tax software as a service. California, Florida, and a handful of others don't. So this is state specific. For data processing, a separately enumerated taxable service in a handful of states. So Texas, Connecticut, and Ohio will tax data processing. It is typically exempt in most in most other states. And then if we're talking about platforms as a service or infrastructure as a service, it's usually exempt, but a few states do tax these too. So these do vary state to state. But again, as long as you're importing your product catalog into Commenda, we'll help you assign these tax codes and your team will not have to worry about it in your invoicing process thereafter. Let's go ahead, Bench. Okay, exemptions, very important. So we talked about one type of exemption, and that's a resale exemption, but there's lots of other ways that a transaction could be exempted as well. So you can either have a product or service exemption, like we just discussed, and you can also have exemptions based upon who your customer is. So one customer type, it would be a reseller, right? You're gonna you're gonna get a resell, resale exemption certificate from that type of buyer. But nonprofits, schools, government buyers, and other certain types of buyers can be exempted as well.

Sam Suechting:
There's typically a unique type of certificate associated with each of those customer personas. As part of the invoicing process before you bill your customer, you can request that they provide their exemption certificate. You'll s keep that on file. You can of course upload this into Commenda or the your end buyer can upload it through our exemption certificate portal. It makes it pretty simple. And that way the next time you raise an invoice, Commenda will check, okay, I see the origin address, I see the destination address, I see the line items and the products. And then they can also identify those customer records as well. It'll check whether an exemption certificate is on file and it'll automatically exempt that sale from tax if they have a valid exemption certificate that's stored in Cabenda. One sort of important caveat to note is there are some important edge cases around triangulation or drop shippings, as we typically refer to them in the US. So If you have questions about that, what I would recommend is schedule a follow-up call with one of our experts. We can talk to you about how we can assist with drop shipments and triangulation, because there are some unique cases in terms of how the exemptions need to be handled for those types of scenarios.

Sam Suechting:
Okay, section six, we'll talk about how compliance works in practice. We already talked a little bit about registration, but you need to get registered before you collect. Collecting tax without a permit is illegal. Most states will impose civil or criminal penalties for doing this. There is one gray area here. Sometimes we get buyers who ask you know they want to go, they're about to make a big invoice. This is typically if they're selling, you know, fifty or hundred thousand or two hundred thousand dollars two hundred thousand dollars worth of goods. That's gonna take them over the nexus threshold. They want to collect on that first sale, but they don't want to hold off on sending the invoice, waiting up for the regulator to get back to them with their sales tax permit. So what you can do is when you are applying for sales tax registration, you can backdate the effective registration date and then go ahead and invoice your customer. So let's say it's July 5th. I really want to invoice my customer, but I know it's gonna take me a week in order to get registered in the state of California. I can go ahead and backdate my effective registration date to July 1st. I can invoice my customer. Once that registration is processed, I can include that tax collection and file it on my July tax filing in the state of California in that example. So as long as you're backdating the effective registration date, it's fine. But in general, you typically need to register before you collect in most scenarios. Registration is almost always online now, and usually it's a one-time process. You'll receive a permit number as well as an assigned filing frequency. So as part of the registration questionnaire, they're gonna ask you what are your first year estimated annual sales? Depending upon what that number is, you will be assigned a filing frequency. The most common would be quarterly. If you are a larger seller, it might be monthly. And then if you're a very small seller, it might be annual. So there are varying frequencies, and these all again are state by state. One thing to note is that you can't just you know, sort of lie and s say a lower estimated annual sale number, because they will adjust your frequency based upon your actual reported revenue. So let's say, you know, I start out, I'm selling a hundred dollars in goods into California, they're probably gonna make me an annual filer. If all of a sudden my sales jump to a million dollars, I'm gonna get a tax notice from the regulator saying, Congratulations, you're now a monthly filer and you're they're gonna switch your reporting frequency.

Sam Suechting:
One thing to note for international companies is that you do need an EIN issued by the IRS. So even though you're getting registered at the state level in the US, you do need an EIN number. This is your federal tax ID number. It is possible to apply for that through the IRS by filing what's called Form SS4. Commenda can assist with this. And we can do the entire registration process for you end-to-end, but including this piece of getting an EIN, which is sort of you need to Commenda because we also do incorporation services, we're pretty familiar with these types of tax ID applications. Last thing to note for international companies as well is that this process gets a lot harder if you don't have a director or officer with a United States Social Security number or individual taxpayer identification number. So, as part of this registration process, you'll need to list what's called a responsible party on the registration application. This is the person who's on file with the state as being the responsible party for the tax remittance. They typically require A tax ID, a US tax ID as part of that responsible party information. And so if you only have foreign officers and directors, it can throw a hitch in the registration process. Many states will permit this, but there will be some that don't. And this can dramatically slow down the time it takes to get registered. Kibeta has kind of a unique offering here because we deal with so many international companies, we do offer what's called a responsible party service, where if you don't have an officer or director with a ITIN or SSN. Then we can provide a responsible party for you and that'll be listed on your registration application.

Sam Suechting:
Okay, looks like we have another question. Say 100% of my sales volume is covered by resellers exemption certificates. Do I still need to register for sales tax and file a return as an overseas seller? So I have an unsatisfactory answer for you, and that is it depends. Some states will require you to still get registered and report and file nil returns. Other states say, you know, as long as there's no liability, you're not obligated to get registered. So that is on a state-by-state basis. A state like North Carolina, for example, will r require you to get registered. A state like Illinois does not. So you do need to check on a state by state basis to understand whether you have that requirement or not. Okay, so you know, we talked about a lot over the course of this webinar so far, and you can begin to understand why it can be so difficult to figure out what is owed in taxes on a particular invoice, right? All these questions need to be answered before you can determine whether it's taxable or what the correct rate is. Where's the destination address? Where's the origin address? Is this an interestate sale or an interestate sale? Is it origin or destination sourcing schemes? Is the seller registered in that jurisdiction? Will this sale exceed my Nexus threshold? What registration type does the seller have? Is the products or service taxable? Does the buyer have a valid exemption certificate? And which of the 44,000 tax jurisdictions are actually relevant to this particular invoice? So all these questions need to be answered before you can actually come up with an accurate picture of what the taxability is on a particular sale. You can certainly do this manually, and I this is how people used to do it back when sales tax was a bit simpler. Is a company like Avalara or Vertex, who are sort of the legacy players, would publish big rate tables. With jurisdictions and the applicable rates, and you would go look up in the matrix manually the applicable rate to be applied to the invoice. Now that we have real-time checkout online and you know high-volume sales, it's almost impossible to do that. And that's when you need to invest in a tax solution like Commenda that can you know do all of this in 44 milliseconds as part of your invoicing process. Let's go ahead, Bench. Filing and paying, we did talk a little bit about this earlier. Returns usually require allocating tax to every jurisdiction. So some states, depending upon whether they have local level taxes in addition to state level, they're going to require you to break out the tax amount due for every single locality that you made a sale into. This is quite tedious. So, like some of these are literally like hundreds of little boxes you have to fill with the like applicable tax amount. And so this is why, again, it could be helpful to have a company like Commenda because we have basically automated this for you. So we can fill all those boxes very quickly. If you are making these collecting these local sales taxes, Just the process of typing in these little boxes is quite tedious, will be a little bit time consuming. So that's one thing to keep in mind. Some states do have what we call prepayment obligations. This is typically only for very large sellers. Most sellers do not need to do this. There will also be some supplemental schedules if you have location-based sales. So if I'm Taco Bell and I'm selling in multiple retail locations in a state, many states are gonna require me to break out my sales by retail location as an example.

Sam Suechting:
We have covered this topic of a nil or zero dollar return. Even if no tax is owed, you still have an obligation to file on time. They will still assess a late filing penalty, even if no dollar, even if no tax was owed. So don't forget to actually file your returns even if nothing is owed. And lastly, I said it once before, but you do need a US bank account in order to actually pay the taxes to the state. You cannot use a foreign bank account. We do have foreign sellers that will use WISE pay a near or something like that, and that typically works fine. But you do need a USD bank account that can do an ACH transfer to a state. Okay. This is sort of the nightmare scenario, right? I'm already behind. I know it should have been registered two years ago. I've done my Nexus study and it turns out I owe five million dollars in back taxes and penalties. This is a real case that Commenda has dealt with. We typically see this often in Canada and Mexico because those are right next door. Sellers think that it's just like VAT and GST in their country and they start selling into the US without, you know, looking into what their compliance obligations are. And then by the time they realize there's an issue, it's sort of too late. So there's sort of two routes this can go, right? The worst case scenario is the state contacts you and they say, Hey, we notice that you're making sales into our state and you're not registered for tax collection remittance. What's going on, right? That's a notice that we get from the regulator. They have what are what are called Nexus Discovery Teams. These are entire teams of people that are employed by the state to go find non-compliant businesses who are typically not registered and should be. Obviously it's very lucrative for the state to find unregistered taxpayers. If they identify you, you're sort of down for the count. I mean, I don't I don't know what analogy you want to use, but there's really no way out of it. And you're gonna have to pay all of those back taxes out of pocket, essentially. Theoretically, you could go back to your buyers like try to claw back some of the taxes, but you know, it's gonna tarnish your customer relationships and it's gonna be very difficult. So not only will you need to pay like the principle of the tax owed. You'll need to pay any penalties and interest accrued, and those can be pretty substantial as well. So it's very important to get registered proactively because this is a tax that's owed at the end of the day by your consumer. If you don't collect it from them, it will be coming out of your pocket. The other scenario is that you should have been registered two years ago. The state does not know you exist and they have not contacted you. In this case, you can avail what's called a voluntary disclosure program or a voluntary disclosure agreement that you can make with the state. Commenda can assist you with these. So, what will happen is commenda will run your historical Nexus study and historical liability. We'll say, state by state, here's what you owe, here's the estimated penalties and interest. We will then take your information, we will anonymize it into a report, we will send that report into the state, not divulging your identity as the seller, and we will say, hey, we have a taxpayer who wants to get registered and become compliant and be in good standing in your state. They'd like to take advantage of your voluntary disclosure program.

Sam Suechting:
And they will go ahead and process your application. They will issue you a sales tax permit. And the benefit of doing this is that they will typically eliminate all penalties and interest accrued. You'll still owe the principal the amount of the tax, but they will also offer you a payment plan in order to pay that back. So there is they do try to create incentives for people who are behind to come forward. And Commenda can assist you with these kinds of voluntary disclosure programs in the event that you have a lot of back taxes and penalties that are owed. Okay, let's go bench. Great. I mean so I think we're wrapping up here. I think there might be one or two more slides after this. But if anyone is attending the webinar for a CPD credit, please respond to the poll that's on the screen now and we can send you a certificate for your continuing education certificate. While that's going on, please feel free to drop any additional questions into the chat that you have about sales tax in general, the legal construction, how it applies to your business, what the invoicing process should look like, and I'll do my best to answer those questions. But this is starting to wrap up the webinar here and I would love to hear any questions you have. Kimeta offers a lot of other webinars that we are also offering continuo education credits on, on other tax topics. I don't do all those, I'm not an expert in everything, but we have lots of experts for transfer pricing, for tax and reporting, for VAT and GST that do offer webinars as well. So I highly recommend you check out our other webinars. Just to talk a little bit about how Commendic can assist you with sales tax in the US, I have hit some of these points already, but we do offer free Nexus tracking. We can integrate with your billing or invoicing system. We will pull in your transactions and let you know when you should get registered proactively. That way you can stay on top of it. We do the state registrations, White Clove. You'll fill out a form in our app and we'll go ahead and process that registration on your behalf. We offer the real-time calculation piece as well, whether that's in an accounting software ERP or on an online checkout scenario. And lastly, we do the filings. So really it's an end-to-end solution. We also work with a lot of different accounting firms globally as well. Like we have you know VAT and GST firms around the world. You know, they want to expand their practice or their scope of business with their clients and they want to offer a sales tax service. We can assist them in offering that service so they can grow their book of business. Any other slides, Bench? I think that's it. So thanks everyone for attending. I'll hang around for just a minute to see if there are any additional questions.

Sam Suechting:
Otherwise, feel free to book a call with one of our experts. We wanna help you get compliant and Commenda is your you know, the partner of choice to help you do that if you're a business expanding globally. And we will follow up with the continuing education credits if you'd like one and also the webinar deck and some materials. And I think we could do a recording as well, right, Bench?

Sam Suechting:
Great. Okay. Thanks everyone for attending. Look forward to seeing you on another webinar or potentially in consultation with one of our experts. Thanks for coming. Bye everyone.