One of the most confusing parts of running a U.S. company as a foreign founder is figuring out the difference between sales tax and VAT (Value-Added Tax). These two systems both affect how businesses charge and remit taxes on sales, but they work very differently.
Misunderstanding them can lead to compliance mistakes, double taxation, or missed opportunities to collect and remit taxes properly.
This guide explains how U.S. sales tax works, why it’s different from VAT, when foreign-owned companies must collect sales tax, and what foreign founders need to keep in mind when selling into both the U.S. and international markets.
Sales tax vs. VAT: the basics
In the United States, there is no federal VAT. Instead, sales tax is imposed at the state and local level. That means each state decides whether to have sales tax, what the rate is, and what transactions are taxable. There are more than 10,000 different sales tax jurisdictions across the country when you add in city and county rules.
In Europe, Canada, and many other countries, VAT is a federal-level value-added tax applied at each step of the supply chain. VAT is generally uniform across a country, collected on sales, and offset by credits for input VAT already paid. Businesses act as collectors of VAT and can reclaim VAT paid on their purchases.
Key difference: In the U.S., sales tax is charged once at the final point of sale to the consumer. In VAT countries, tax is layered throughout production and distribution.
When does a U.S. company need to collect sales tax?
A U.S. company only needs to collect sales tax if it has a sufficient connection, called nexus, to a particular state. Nexus can be created in several ways:
- Physical presence nexus: Having an office, warehouse, or employees in a state.
- Economic nexus: Exceeding a certain level of sales or transactions into a state, even without physical presence. For example, in California, having $500,000 in sales to customers in the state creates nexus.
- Marketplace nexus: Some states require marketplace platforms like Amazon or Shopify to collect and remit sales tax on behalf of sellers. If you sell only through these platforms, they may handle sales tax for you.
If you don’t have nexus in a state, you generally do not need to collect sales tax there. But once you cross the threshold, you must register, collect tax from customers, and remit it to the state.
In general, service companies such as consulting firms, software engineers, or marketing agencies do not need to collect sales tax, since most states only apply sales tax to physical goods and certain digital products.
Example
A Delaware LLC sells custom merchandise online. In its first year, it makes $50,000 in sales to customers across the U.S., but no more than $10,000 in any one state. At this level, it does not trigger economic nexus in most states. By year three, the LLC makes $600,000 in sales, with $300,000 going to California customers.
Because California’s threshold is $500,000 total sales into the state, the company must register and begin collecting California sales tax on sales to California customers.
Common mistakes foreign founders make
- Thinking there is a federal sales tax. There isn’t—sales tax is state-level. The IRS does not collect sales tax.
- Confusing sales tax with VAT. A U.S. company is not subject to VAT when selling domestically. But if it sells into Europe, it may need to register for VAT in that country.
- Assuming marketplace sales remove all obligations. While Amazon or Shopify may collect and remit on your behalf, you may still need to register and file informational returns depending on the state.
- Not tracking thresholds. Economic nexus thresholds vary by state. Missing one can mean months of uncollected sales tax liability.
- Forgetting that services can also be taxable. Some states tax digital services, SaaS products, or software downloads.
What about VAT?
If your U.S. company sells into a country with VAT (for example, selling software subscriptions into Germany), you may need to register for VAT in that jurisdiction once your sales cross a certain threshold. Unlike U.S. sales tax, VAT applies at the federal level and is coordinated across the EU.
Many countries have simplified “non-resident VAT registration” procedures for foreign companies selling to their residents.
Example
A Delaware C-Corp sells SaaS subscriptions globally. In the U.S., it only collects sales tax in states where it has nexus. But once sales to Germany exceed the EU’s digital services threshold, the company must register for VAT in Germany (or through the EU’s One Stop Shop system) and begin charging VAT on sales to German customers.
Double taxation concerns
Foreign founders often worry about being taxed twice—once under U.S. sales tax and again under VAT. In reality, these are separate systems applied in different markets:
- U.S. customers: You may need to charge state sales tax depending on nexus.
- European customers: You may need to charge VAT depending on thresholds.
- You generally do not pay both on the same sale.
What sometimes creates confusion is accounting for sales tax and VAT in your books. Sales tax collected in the U.S. is a liability owed to the state, not income. VAT works similarly but with input VAT credits.
Federal vs. state obligations
It’s important to keep in mind that sales tax is a state-level obligation. Bookmate does not handle state sales tax filings or registrations. These are typically handled through state websites, compliance software like Avalara or TaxJar, or local advisors.
Bookmate’s role is in federal tax compliance—filing your 1120, 1065, 5472, and related IRS forms. We help you understand your overall obligations, but your registered agent or state compliance provider handles state sales tax specifically.
Real-world scenario
A Canadian founder sets up a Wyoming LLC to sell home goods online. In the first year, all sales are through Amazon. Amazon automatically collects and remits sales tax in most states. The founder thinks this means no other filings are required.
However, California sends a notice requiring the LLC to register because its sales into the state exceed $500,000. The founder must register with California’s Department of Tax and Fee Administration to stay compliant.
At the same time, the LLC’s federal obligations are handled through Bookmate, ensuring Forms 5472 and pro forma 1120 are filed with the IRS.
Final thoughts
Sales tax and VAT are two very different systems, and understanding the difference is critical for foreign founders. In the U.S., sales tax is a state-level responsibility, triggered by nexus rules. VAT, on the other hand, applies abroad and often requires separate registration.
Mixing them up can create costly mistakes, but treating them separately helps keep compliance clear.
Bookmate helps with your federal IRS filings, while your state sales tax obligations are managed through other providers or platforms. Each business is unique, and the right compliance plan depends on where your customers are and how you sell.
Learn more at trybookmate.co or book a consultation today.
