You reside in Turkey and have started an E-commerce business with the aim of selling products to US residents. Let's say your form of e-commerce is Shopify dropshipping or software, digital services. You formed an LLC in the USA, obtained your tax number (EIN), opened your e-commerce platform and started sales.
What happens now?
Entrance
I sell products to US residents, will I collect sales tax from customers at the time of ordering? This question will constantly come to your mind and will create psychological pressure on you over time, so learning about the issue from reliable sources and addressing this process instead of ignoring it will save you from this burden.
“I sell products to US residents and do I need to collect sales tax?” Let's start by answering the question:
The answer to this question was quite simple until 2018. As a foreigner, you had no responsibility to collect any sales tax unless you had a physical connection/connection to the state you were selling to. (The physical connection may be an office, a shop, a store, an insured employee, a warehouse in the state where you sell)
In a nutshell, that was the situation for foreign sellers in the US until 2018: if there was no connection, they were exempt from collecting sales tax.
In 2018, a major situation occurred that would change the functioning of e-commerce sales taxes and the process changed.
On June 21, 2018, the United States Supreme Court ruled in South Dakota v. Wayfair, Inc. the case , he made a decision in favor of the state. According to the new provisions resulting from this decision, states would now begin to collect sales tax from companies. After the economic nexus laws (Economic Nexus) emerged, the rules began to change.
What is Economic Nexus?
After the aforementioned case, the Supreme Court decided that in addition to the companies having a physical connection, they also have an economic connection when they sell to people in that state. Following the Supreme Court's Wayfair decision, it was decided that a seller (Shopify, Amazon or any e-commerce business) no longer needs a physical presence to have a connection with that state, and can have a connection in a state thanks to an economic connection.
Since this decision sets a precedent, foreign Shopify or Amazon operators now create an economic nexus (Economic Nexus) in each state where they sell.
By the way, if you have a physical connection in the state where you sell, this means that the situation is still the same and there is no change.
Marketplaces like Amazon collect sales tax themselves in almost all states in the US. If you are an Amazon marketplace seller, you do not need to collect sales tax in states that Amazon supports. Amazon collects this tax itself and declares and pays it to the state.
Economic Nexus Content
It means making a certain amount of turnover or making a certain number of transactions in any state.
Economic Nexus is based on gross sales amount or a certain amount of transaction limits. Once one of these two thresholds is met, Economic Nexus is triggered. Some states base Economic Nexus on both criteria, while others base it on a sales threshold.
Example 1:
Triggering economic nexus in South Dekota requires 200 transactions or $100,000 in annual gross sales. Whichever of these limits is exceeded first, it is time to collect sales tax in that state.
Example 2:
This time, imagine that the state you sell to is Alabama. So, let's say your customers are from the state of Alabama and you started sending products and selling to this state. In Alabama, you can make $250,000 in gross sales during the year. There is no transaction limit, only turnover limit. It doesn't matter if you make $250,000 in one sale or separate transactions for 500 customers. Since there is no threshold for the number of transactions, the limit is $250,000. As long as you don't exceed that figure, you don't have to collect sales tax from that state's residents.
What Happened After the Wayfair Decision?
3 years have passed since the decision (as of the date of this article), and over time, almost all states have updated their laws on Economic Nexus. There are different limits depending on the states. We have previously shared the list of all states in this article, you can also review the limits.
Each state imposed different limits, some states set a $100,000 turnover threshold per year, others capped it at 200 transactions per year. Some states have imposed both a turnover limit and a transaction limit, and whichever is exceeded first triggers the economic bond.
No Statewide Sales Tax in Some States
There are five states that do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. These states do not collect taxes at the State level, but you may need to collect taxes on a municipal basis (some within-state areas apply). Municipalities also determine their own Economic Nexus limits, so search the states' websites.
What Should I Do When an Economic Nexus Occurs?
As long as you do not exceed the limits and thresholds, you do not need to collect sales tax. There is no problem in this regard, but let's say your business starts to go well and sales increase. At this stage, when you start to exceed your limits in some states, you have some work to do.
- Once the limit starts to be exceeded, you need to start collecting sales tax from your customers in that state.
- You must register to file taxes in the exceeding state
- You need to find out the tax declaration times of the state and pay the taxes you collect from the state you sell to that state.
If all these are a big burden for you and you don't have time to deal with them, there are two things you need to do;
1. It is necessary to make an agreement with an accounting firm and transfer the process to them.
2. Using a cloud-based application, you can automatically collect sales taxes and pay them to the states automatically (declaration). For this, there are cloud-based software that automatically integrates with platforms such as Shopify and Woocommerce. One of the most preferred Taxjar .
Taxjar handles this entire process automatically. In other words, you can decide through the software to collect sales tax from customers at the percentage rates of the states and within what time period to declare it to the relevant state. We can even call it a fully automatic accounting system that automatically handles all taxes (after applying to the states and opening a tax record) after the necessary information is entered into the panel.
If you do not use this type of software, it becomes very difficult to carry out the process, and when you start exceeding the limits in each state, you will have to file taxes in each state individually. As I mentioned above, this is an option. The first option was to hand it over to an expert, and the third option, if you have time, is to keep a record of it one by one, calculate it when the tax return arrives, and submit it to the state. The most boring and time-consuming option is option 3.
As a result, when your sales increase and the Economic Nexus starts to trigger, it is time to collect sales tax.
How is Income Tax Status Occurred?
Additionally, this overage will now require you to pay income taxes because, if you use payment gateways like Stripe and 2checkout, they will send you 1099-K . When you fill out this 1099-K form sent to you (they notify you through the panel or by e-mail), 1 040-NR will also be included in addition to filing 5472
It is not the case that no taxes are paid in the USA. There are some limits and criteria depending on the business situation, the important thing is to be aware of this and to work with a competent CPA in this process. Because a CPA who is an expert in this field will process all your expenses and support you in paying ridiculous amounts of taxes at the end of the day compared to Turkey. at the question and answer article we did with a CPA who specializes in this field .
If you do not exceed these limits and the trigger does not occur, you do not need to collect any sales tax. At this stage, it is important to follow your sales, know which state you send the most products to, and foresee limit exceeding. Will you make these checks and now work with an accounting expert? Or will you use software? You must answer the questions yourself.
We are not an accounting expert or tax lawyer, we are just trying to make the information we obtain from reliable sources available to entrepreneurs through this platform. If you would like to leave accounting operations entirely to experts, you can find a list of companies specialized in foreign e-commerce from this article .
Sources:
https://www.irs.gov/individuals/international-individuals
https://help.shopify.com/tr/manual/taxes/us/us-tax-reference
https://oandgaccounting.com/form-5472-filing-exemption-for-foreign-owned-single-member-llcs/
https://www.milesconsultinggroup.com/blog/2020/06/23/wayfair-two-years-what-have-we-learned/
4 Comments . New Comment
Okay, we understand the sales tax, sir. What is the income tax situation for LLCs? For example, I did not exceed the threshold in any state. At the end of the year, money was deposited in my Strip or Mercury bank account and I transferred most of it to my bank accounts in Türkiye. What is my situation in terms of income tax? Is there any limit there? If I report the money I transferred to my Turkish bank accounts to the treasury and pay the tax, will I still pay income tax or any other tax in the USA? So in summary, what are the tax liabilities for LLCs other than sales tax?
If there is no sales tax and there is no economic bond, there is no income tax. All you have to do is fill out Form 5472 for LLC in the USA every year and report the amount of income and expenses to the US Revenue Administration. Of course, if you still want to tax your income in the USA, you can make an agreement with an accountant and pay tax even if it is not necessary. No state will say no to extra taxes.
I think it is also valid for Shopify, because we sell products to the USA and we do not have a branch there, in this case, an economic bond is created?
We can definitely say that it applies to Shopify.