International businesses entering or expanding into the U.S. market often underestimate the complexity of sales taxes and tariff planning and compliance.
Many companies new to the U.S. market are familiar with value added taxes (VAT) and may assume that sales and use taxes function in the same way. However, as noted below, there are fundamental differences between sales and use taxes and VAT.
Businesses entering or expanding into the U.S. should also consider how customs duty obligations may affect their business strategy. While tariff planning itself is not a new consideration for these businesses, the current tariff environment is highly volatile, with frequent changes driven by executive orders. This volatility requires companies to remain adaptable and responsive to shifting tariff pronouncements. Furthermore, heightened enforcement against tariff and trader fraud in the U.S. has increased complexity and may require businesses to dedicate additional resources to compliance.
Differentiating Between Sales and Use Taxes and VAT
Organizations that mistakenly equate sales and use taxes and VAT may underpay their tax obligations, leading to compliance issues that can result in fines, penalties, and other assessments. To build a compliance program that will support their U.S. operations, organizations must understand how state sales and use taxes are collected and remitted, the rules that define their obligations, and how rates are set.
Table: Three Key Differences Between Sales and Use Taxes and VAT and Sales and Use Taxes
| Sales and Use Taxes | VAT | |
Description | Sales and use taxes are generally imposed on the sale or use of all goods, but only on certain services. Sales tax is levied only on the final sale. | VAT or goods and services tax (GST) are broad-based consumption taxes assessed on most goods and services. VAT and GST are levied at each stage of the supply chain. |
Tax Authorities | Levied by individual states and/or localities. | Primarily country-level taxes, although some countries have local-level taxes (e.g., Argentina, Brazil, Canada). |
Rates | Tax rates are generally the sum of a statewide rate and various local (i.e., cities, counties, municipalities) rates. Within a given jurisdiction, rates are generally the same on taxable sales and purchases (with some exceptions) Services are generally exempt from sales tax. | Rates are set at the national level. Rates vary between different types of sales and purchases. Services are generally taxable, with some exceptions. |
Learn more about the differences between sales and use taxes and VAT.
Understanding Sales Tax Obligations
Businesses doing business in multiple U.S. states must determine which of those states will require them to collect and remit sales tax. In 2018, the U.S. Supreme Court issued a decision in South Dakota vs. Wayfair affirming a South Dakota law that required companies to collect and remit sales tax when sales to customers in the state exceed $100,000 or consist of more than 200 separate transactions. Prior to this decision, companies were generally required to have some physical presence within a state to be subject to its taxing jurisdiction.
Simply put: If a business has property or representatives (such as employees or independent contractors) in a state or if its sales exceed a certain threshold, it must register for and comply with the state’s sales tax regime.
Thresholds, as well as rates and taxability rules, vary by state. It should be noted that the rules governing a state's ability to tax a company apply equally to both foreign and U.S. companies.
Businesses that have been selling to U.S. customers for a period of time are well advised to determine whether they have any historic sales tax obligations. There are several ways to remediate such obligations, including tax amnesties, compromise agreements, filing past returns, seeking penalty abatement, and participating in a voluntary disclosure agreement (VDA) program. VDAs are designed to promote compliance among taxpayers who discover past filing obligations and liabilities that have not been discharged. VDA programs vary by state — some are statutory while others are administrative — and typically limit exposure for retroactive tax liabilities to the prior three or four tax years.
Learn more about the state tax registration process and remediating prior exposure.
Navigating Tariff and Customs Issues
In addition to sales and use taxes, international companies must consider the tariffs, trade, and customs regulatory landscape. These issues may not traditionally sit within the tax function, but they can significantly affect the cost and compliance landscape for foreign businesses. Understanding how tariffs apply to their products and supply chain and the resultant customs and trade implications are critical for successful market entry.
As they enter the U.S. market, companies must not only understand cumulative duty rates (based on harmonized tariff codes, country of origin, and valuation) but also proactively explore customs duty mitigation strategies. These may include involving the first sale rule (FSR), exploring cost unbundling, leveraging duty drawback programs, utilizing foreign trade zones or bonded warehouses, properly assigning harmonized tariff classification codes, and reviewing eligibility for preferential trade agreements. Implementing such strategies can help reduce overall duty exposure and improve cost efficiency.
Equally important is the establishment of a robust customs and trade compliance function. Companies should prioritize building strong compliance programs with comprehensive documentation, clear policies and procedures, and regular training for staff involved in import activities. Routine audits of import transactions are essential to help verify accuracy, and to confirm that positions taken on tariffs are compliant and defensible.
While most companies are somewhat familiar with customs compliance obligations, recent developments have heightened the risks associated with noncompliance. Due to shifts in enforcement strategy, noncompliance may not only lead to civil fines and penalties, but also criminal prosecution. To effectively manage these risks and support successful market entry and ongoing operations, it is essential for organizations to establish a robust trade compliance function and implement effective duty mitigation strategies.
Helping Clients on Their Journey
International companies face a range of tax and regulatory challenges that require careful planning to help bring about a successful U.S. launch or expansion. Companies must understand the full scope of their tax and other compliance obligations early in their expansion planning to avoid unforeseen liabilities or penalties stemming from noncompliance. A holistic view of U.S. tax and customs planning processes and best practices are critical for success. Working with a trusted third-party advisor that possesses deep experience in the U.S. tax landscape can provide valuable guidance throughout the process. Learn more in our Doing Business in the United States: A BDO Roadmap.
Have you built your U.S. tax and regulatory compliance program? Contact us to get started.