4.99 on the shelf, 5.40 at the register: US sales tax explained

This is the crucial question, and its name is nexus. Only once you have a connection to a state do you have to collect and remit tax there.

That connection arises in two ways. Physically, if you have an office, a warehouse, staff or goods there. And economically, if you exceed certain sales or transaction thresholds, even with no presence at all.

The second route is new. It goes back to a Supreme Court decision from 2018, and it fundamentally changed the picture for foreign sellers. Before, you needed a physical location. Today, sales are enough.

Because it isn't levied by the federal government but by states, counties, cities and special districts, and there are more than ten thousand of them.

The rate you have to charge generally depends not on where you are based but on where you ship. And it's built from several layers: state plus county plus city plus, where applicable, a transit or school district.

For a European online seller, that means there is no single American sales tax rate. There are thousands, and which one applies has to be worked out again for every single delivery address.

In most states, economic nexus kicks in above annual sales of $100,000 in that state, and in some also, or instead, at a certain number of transactions.

That sounds high. It isn't. A European seller doing good business in California, Texas and New York crosses these thresholds in three states at once without ever setting foot there.

And then the real work begins: registering in every state concerned, collecting at the correct rate, filing on each state's own schedule, remitting. Some states want monthly returns, some quarterly, some annual.

Doing this by hand is a losing game. Specialist providers automate rates, registrations and filings, and for any serious seller they are the right investment.

Many European sellers believe the issue takes care of itself because their platform withholds the tax. That's only half true.

Most states now have rules under which the marketplace operator collects and remits sales tax on sales made through it. For those sales, you're off the hook.

You're not off the hook for everything you sell alongside: through your own shop, through direct orders, wholesale. And in some states you still have to register and file zero returns, even though the marketplace remits.

This very mix of platform and direct sales is the most common setup among European sellers, and the most common cause of nasty surprises in an audit.

Then there's the physical side. If you use the fulfillment services of the big platforms, your goods sit in their warehouse network, and that network spreads them across the whole country.

Many states take the view that goods in a warehouse create physical nexus. In other words, you can owe tax in ten states because an algorithm sent your boxes there.

The question is disputed, it's answered differently from state to state, and for any seller using warehouse logistics it is the most important one in the whole field. For a starting point, see Nexus laws and sales tax and Registration for marketplace sellers.

For goods, the situation is complicated. For services, it's a maze. Some states don't tax services at all, some tax certain categories, some tax almost all of them.

Digital services are where things move fastest: software as a service, digital content, data processing. Several states change their rules every year, and what wasn't taxable yesterday is today.

If you sell digital services from Europe to American customers, have this area reviewed every year. It's one of the few topics in US tax law where standing still gets expensive.

One point that surprises European businesses: in the United States, you quote net prices. It's not just habit, it's a practical necessity, because with thousands of different rates you can't give one uniform gross price.

For your marketing, that means the price the customer sees isn't the price they pay. European businesses that quote gross prices out of habit cause confusion, and in e-commerce, abandoned carts.

For your costing, it means the tax is a pass-through item, not income. Count it as revenue and you overestimate your business and underestimate your liabilities.

And for your cash flow, it means the money you collect isn't yours. It sits with you until the return is due. Businesses that treat these amounts as working capital run into trouble at the next payment, and that is one of the most common causes of cash problems among young American sellers.

Finally, the question every European business owner asks: is this like our VAT?

No, and the difference is fundamental. European VAT is charged at every stage and offset against input tax. American sales tax is charged only once, on the sale to the end consumer.

That's why there is no input tax deduction here, and why you need an exemption certificate for sales to resellers. Mix up the two systems and you get both wrong: you collect where you don't have to, and you deduct where there's nothing to deduct.

Work out where you have nexus, and do it before you cross the thresholds, not after.

Register where you must, and only there. An unnecessary registration creates a permanent filing obligation.

Automate the calculation. Thousands of rates and constant changes are no job for a spreadsheet.

And keep your exemption records on file. If you sell to resellers, you don't collect tax, but you must hold a valid exemption certificate. If it's missing in an audit, you owe the tax yourself.

If you want to set up your US sales operation or have an existing structure reviewed, talk to Mount Bonnell Advisors in Austin, Texas. The basics are in Sales tax in the USA.

In consultations, European founders almost always arrive with the same question: which entity type, which state. Both matter, and neither is the most expensive question.

The most expensive question is: in which states will I owe sales tax, and from when?

Because the wrong entity type costs a few hundred dollars a year and can be fixed. Uncollected sales tax over three years in eight states costs five figures and can't be recovered from customers after the fact. You owe it yourself, out of your margin.

That's why this topic belongs at the very start of any US sales setup. Not in year two, once the revenue is there, but in the planning, before the first box ships.

Back to where we started. Three days in August when school supplies and clothing are tax-free are, economically speaking, a questionable tool. They shift purchases rather than create them, and they cost the state revenue.

Even so, many states hold them every year, and they are hugely popular. The reason is less the savings than the signal they send: this state sees that back-to-school costs families money, and it does something visible about it.

For European observers, it's a good window into American tax policy. It works less through redistribution than through visible, targeted relief. Fewer child benefits, more tax-free days.

You can call it inefficient, and economists regularly do. But it fits a country that would rather leave money with its citizens than collect it and hand it back.

If you sell in Texas or another state with tax holidays like these, put them in your marketing calendar. Sales in the affected product categories run well above normal on those weekends.

And know the rules precisely, because they get granular: value limits per item, certain product categories included and others excluded, special rules for online orders depending on when the order is placed and when it ships.

Get the billing wrong on one of those weekends and you have either collected too much, which annoys customers, or too little, which you then owe yourself.

First: before your first sale, work out in which states you have a tax connection. This question costs more than your choice of entity and more than your state of formation.

Second: never treat collected sales tax as cash flow. It isn't yours, you are just holding it.

Third: automate. Thousands of rates, constant changes and different filing deadlines are no job for a spreadsheet, and no job for good intentions either.

Because in the end, sales tax is the perfect example of American administrative logic: the state asks for little, but it asks for it precisely, it won't remind you, and it won't forgive you. Set the system up once and you never think about it again. Let it slide and you pay double years later.

Update: What happens next is covered in Texas wants to scrap the double tax on platform fees, and anyone selling online should follow the coming weeks closely.

Consultation & implementation

If you'd like to find out what this means for your own situation, the best step is to book a consultation.