The U.S. has no VAT. Instead, sales tax is charged once, on the final sale to the consumer, with no way for businesses to recover it, and each state (and often each city) sets its own rules and rates. Foreign companies that sell to U.S. customers are subject to the same rules as U.S. companies. Orbiss’ advice: register as soon as you sell to U.S. end users, use dedicated tools, and once sales grow, invoice U.S. customers through a U.S. company.
The United States does not have a VAT system like Europe. Instead, a “sales tax” applies when goods or services are sold on U.S. soil. To help European entrepreneurs expand successfully into the U.S., Maddyness explains this unique system.
In the U.S., a tax system comparable to VAT (value added tax) applies. As soon as a company sells to an end user residing in the U.S., the sale is subject to sales tax. The issue therefore affects companies based in the U.S. and in France alike.
However, many companies are not compliant, usually due to a lack of knowledge. “Sales tax is very specific; many people have not mastered the subject. It is quite technical, but in reality, once you understand the principle, it is not that complicated,” explains Fabien Messina, Head of Accounting, Tax and Consolidation at Pigment, a startup that recently raised $145 million.
The system has some key differences from the one used in the European Union. VAT is a multi-stage tax levied at every stage of production and distribution, and businesses can recover the VAT paid on their purchases. Sales tax, on the other hand, is only charged once, at the final sale to the consumer, with no option for businesses to recover it. For a side-by-side comparison, see our guide to U.S. sales tax vs. VAT.
Another major difference is that VAT is a largely harmonized system within the European Union. In the U.S., however, there is no federal sales tax; each state sets its own rules. The sales tax rate varies significantly from one state to another, and even from one city to another. “That’s where the risk lies. Since there is no tax treaty between each American state and the French government, foreign companies are subject to the same regulations as American companies as soon as they make sales on American soil,” warns Yoann Brugière, co-founder of Orbiss, a firm specializing in helping businesses expand into the U.S.
“With sales tax, the difficulty lies mainly in the implementation. Since everything is decided at the local level, it is impossible to manage manually. New Jersey, for example, applies a single rate throughout the state, while in Colorado, rates can vary from one city to another and even from one street to another. You therefore need a project manager and tools to manage it,” explains Yoann Brugière. The two leading tools on the market today are Avalara and TaxJar.
For Orbiss, the basic rule is to register with the U.S. authorities as soon as a company sells to end users on U.S. soil. “As soon as you reach a certain number of sales, it makes sense to create a U.S. company and make sure the sales go through it,” says Yoann Brugière. Our entity formation team can help you set it up.
“There are still turnover thresholds for being liable, which are between 100,000 and 500,000 euros depending on the state,” he explains.
“The day you start taking this subject on, it’s a full-time job!” shares Fabien Messina. When he arrived at Pigment, he straightened everything out but continued invoicing through the French company. Today, Pigment is taking the next step with Orbiss by using its U.S. subsidiary to invoice U.S. clients.
“When we started working with Fabien Messina, he had already studied the subject a lot and worked on it on his own, but most of the time, when companies knock on our door, there are a lot of things to put back in order,” says Yoann Brugière. “In terms of costs, companies would gain a lot by anticipating this subject.”
“Not to mention the hidden costs, in terms of time spent undoing things that have already been built,” adds Fabien Messina. “The registration process is not technically complicated, but in my opinion it is more worthwhile, in terms of cost and time, to delegate it to people whose job it is. Operationally, it is quite cumbersome, because when registering the new company, we also have to review everything that comes with it: invoicing, accounting, CRM, etc.”
“Ultimately, when sales volumes increase, it becomes more worthwhile to bring this function in-house, and to use a company like Orbiss as support on technical subjects,” adds Yoann Brugière.
“I am surprised by the number of startup accounting directors who are not at all compliant with sales tax rules, and some of whom are not even aware of the subject,” says Fabien Messina. “It is a risk often overlooked by French companies, and non-American companies in general, particularly in e-commerce and software, because their model has no physical borders, so they do not necessarily look at where their customers are,” confirms Yoann Brugière. “However, in the event of an audit and a breach, it is the French company that is directly put at risk, because most of the time, these brands do not have a company registered in the United States,” he explains.
It is important to be aware of the obligations and the risks of non-compliance, and to put the right tools in place with the support of experts. “A word of advice: start looking into it from the first euro invoiced in the U.S. Even if things are not put in place straight away, at least you can anticipate them,” concludes Fabien Messina.
Orbiss has a dedicated team for U.S. sales tax compliance, and our sales tax video series covers the basics. Contact us to review your exposure.
This is a translation of the French article published in Maddyness by Chloé Le Nignol. Read the original version.
No. The U.S. uses sales tax instead, a tax charged once, on the final sale to the consumer, with no way for businesses to recover it. There is no federal sales tax; each state sets its own rules, and rates can vary from one city to another.
Yes, once they meet a state’s requirements. There is no tax treaty between each U.S. state and France, so foreign companies selling on U.S. soil are subject to the same sales tax rules as American companies.
Orbiss recommends registering as soon as you sell to end users in the U.S. and, once you reach a certain volume of sales, creating a U.S. company and invoicing U.S. customers through it.
Because rates are set locally (in Colorado, they can vary from one street to another), sales tax can’t be managed manually. According to Yoann Brugière, the two leading tools on the market are Avalara and TaxJar.
From the first sale invoiced in the U.S. Even if processes aren’t in place right away, anticipating the subject avoids the cost of fixing things later.
This article is for general informational purposes only and does not constitute legal, tax, or accounting advice. Rules and requirements vary by company, individual, and jurisdiction, and can change. Please seek advice appropriate to your specific situation.