The US market is extremely attractive for Irish businesses if you can crack it. One point of confusion can be whether Irish businesses have any obligations in regards of collecting US sales taxes. In this blog post, we will give you a high-level overview of what your obligations are.
Differences between Sales Tax and VAT
Value-added tax (VAT) and sales tax are both types of consumption taxes that are levied on goods and services. However, there are some key differences between the two taxes.
VAT: VAT is a tax on the value added to goods and services at each stage of production and distribution. This means that businesses can claim back the VAT they pay on their purchases as a credit against the VAT they charge on their sales.
Sales tax: Sales tax is a tax on the final sale of goods and services to the consumer. This means that businesses cannot claim back the sales tax they pay on their purchases.
Physical and Economic Nexuses
Whether or not your business will need to start collecting US sales tax or not will depend on whether you have established either a physical or economic nexus. What complicates this even further is that there are different rules and thresholds for all US states.
If you want to check out what the differing rules are in each US state, then you can check them all out here.
Physical Nexus
Physical nexus is established when a business has a physical presence in a state, such as:
- Owning or leasing real estate
- Having employees or inventory in the state
- Maintaining a physical office or store
If a business has physical nexus in a state, it is generally required to collect and remit sales tax on all sales made to customers in that state, regardless of the customer’s location.
Economic Nexus
Economic nexus is established when a business has a significant amount of economic activity in a state, even if it does not have a physical presence there. This could include:
- Having a high volume of sales to customers in the state
- Maintaining a website or online presence that targets customers in the state
- Regularly soliciting business from customers in the state
The specific criteria for establishing economic nexus vary from state to state. However, as e-commerce and online transactions have become more prevalent, states have increasingly been expanding their definitions of economic nexus to capture revenue from businesses that operate primarily online.
For example, in Illinois if your sales surpass $100k, or 200 transactions in 12 months then you will have established an economic nexus.
What about if you sell through marketplaces such as Amazon and eBay?
One of the most common ways to get exposure to the US market is by selling your products through marketplaces such as Amazon, eBay, and Etsy.
These companies are now obligated to collect and remit sales tax on behalf of their sellers to the tax authorities in each state, which completely removes the burden from the seller.
Do you need to pay Irish VAT on Exports to US customers?
No, there is generally no requirement for Irish businesses to charge VAT on sales of goods or services to either businesses or private individuals outside of the European Union.
It is vitally important (especially for the export of services), that you can actually prove that the customer is based outside of the EU.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
