Sales Tax in the United States

More and more Israeli businesses are now selling to customers in the United States. Sometimes this happens through the company’s website, sometimes through Amazon or other platforms, and sometimes through a distributor or a local logistics solution. From a business perspective, this is a natural step. From a tax perspective, however, many companies enter the U.S. market without realizing that, at a certain stage, they may become subject to registration, collection, and reporting obligations.

The challenge begins with the fact that the United States does not have a uniform system like VAT in Israel. Each state has its own rules, and in some cases there is an additional local tax as well. It is therefore not enough to know that there are sales to the United States. You need to examine in which states the sales are taking place, what exactly is being sold, how the activity is structured, and whether exposure has already arisen that requires attention.

What Is Sales Tax in the United States?

Sales tax in the United States is an indirect tax that is generally imposed on the sale of tangible goods, and sometimes also on services, digital products, software, or Software as a Service (SaaS). Unlike VAT, which is a nationwide tax with a relatively structured input offset mechanism, sales tax operates on a state and local basis, with significant differences among jurisdictions. As a result, an Israeli business may discover that a particular product is taxable in one state, exempt in another, and subject to a completely different rate in a third.

Alongside sales tax, there is also use tax. The concept is simple: if sales tax was not collected at the time of the transaction, the state may require use tax based on the use, storage, or consumption of the product or service within its jurisdiction. In practical terms, use tax is intended to prevent a situation in which a purchase made outside the state, or from a seller that did not collect tax, results in the avoidance of tax that should have been paid. Understanding the distinction between the two taxes—who is required to collect, when, and under what circumstances – is the starting point for any serious review.

When Does Nexus Arise

The central question in almost every review is whether the business has created Nexus, meaning a sufficient connection to a particular U.S. state that allows that state to require registration, collection, and reporting. In the past, the emphasis was mainly on physical presence, such as an office, employees, or a warehouse. Today, the picture is much broader, because many states also examine economic nexus, meaning sales volume that reaches a certain threshold in that state, with no requirement for physical presence.

This is precisely the point that surprises many businesses. Sometimes the business has no office in the United States, no local employees, and does not even view itself as operating there. And yet, simply selling to customers in a particular state at a certain volume may be enough to trigger tax obligations. Another point that does not always receive sufficient attention is that holding inventory with a logistics provider – such as a fulfillment service in the United States – may create physical nexus, even if the business has no other local presence. This is why a state-by-state review is so important, based on the business model and the type of product involved.

How Do You Determine in Practice Whether There Is a Sales Tax Registration and Collection Obligation?

Once you understand what nexus is and when it arises, the practical question follows: how do you assess it in real terms? The correct review does not begin with an abstract legal question. It starts with an orderly mapping of the business activity. You need to understand in which states the customers are located, what the sales volume is in each state, whether physical or digital products are being sold, whether distribution centers are being used, and whether there are representatives, service providers, or partners creating a presence on the ground.

It is no less important to review the documentation. Sometimes a business has good sales data at a macro level, but no organized breakdown by state, no clear documentation of inventory location, and no alignment between the commercial agreements and the way the business actually operates. In such cases, exposure is not just a tax issue. It is also a matter of sound management and the ability to present a consistent picture if a review is required.

In addition, it is important to examine whether the commerce platform or marketplace acts as a Marketplace Facilitator in the relevant states, and whether it is the party responsible for collection. Here too, it is a mistake to assume that everything is automatically covered. Sometimes part of the transactions are covered by the platform, while another part is not. Once the activity and the collection question have been mapped, it is also important to examine the classification of the product itself – a question that can surprise businesses no less than the nexus issue.

How U.S. Tax Authorities Review Foreign Businesses

Many businesses assume that if they are offering a technological solution, a digital product, or software, the product is not necessarily taxable. That assumption does not always hold up in practice. In some states, software, remote access, ancillary services, or usage licenses may be taxable, while in other states completely different rules may apply. Proper classification of the product or service is therefore an integral part of any serious exposure review.

U.S. state tax authorities examine facts, not declarations. Issues that repeatedly arise in audits and reviews include rapid growth in sales into a particular state, the use of fulfillment services, the sale of taxable products that the business treats as exempt, the absence of registration where significant activity appears to exist, and discrepancies between internal accounting records and actual reporting.

Pricing is also important. A business that sells into the United States without taking into account the tax regime in the relevant states may later discover that its profitability has eroded because the tax was not built into the business model from the outset. In other cases, the difficulty stems precisely from a lack of documentation: there is no organized breakdown of sales by state, no clear documentation of resale certificates, and no alignment between the actual supply chain and what is written in the agreements.

Illustrative Example Only: How Exposure Arises Unintentionally

Suppose an Israeli company sells accessories for electronic products through its own website to customers in the United States. In the first year, the sales are spread across several states, but over time one state becomes a major market and sales volume there grows significantly. At the same time, the company begins holding inventory with a U.S. logistics provider in order to shorten delivery times. From the company management’s perspective, this is still a remote activity. But from the perspective of the relevant state, economic nexus—and even physical nexus—may already have been created. If the company did not review the thresholds, failed to register on time, and did not begin collecting tax, it may face an accumulated liability just when the business activity appears to be successful.

How to Do It Properly

The right approach starts with a diagnostic review. A business with U.S. activity should map the states in which it sells, its sales volumes, the types of products or services involved, and the actual supply chain. After that, it is necessary to examine in each state whether nexus has been created, whether there is a registration obligation, whether relevant exemptions are available, and whether another party in the chain is the one required to collect the tax.

After the initial review, it is important to create a routine: not to rely on a one-time check, but to establish a monitoring mechanism for sales thresholds, inventory changes, entry into new states, and the tax classification of products. For a business that is growing quickly, planning ahead is just as important as dealing with an existing issue.

When a business reviews its exposure in time, it has more options available: to create an orderly tax policy, update processes, adapt agreements, and manage the issue proactively. By contrast, once letters, information requests, or an audit enter the picture, room to maneuver becomes narrower, and decisions sometimes have to be made under pressure. U.S. sales tax is not an issue reserved only for large corporations—mid-sized Israeli businesses may also find themselves within the scope of obligation sooner than expected.

In summary, activity in the United States can open significant business opportunities, but it can also give rise to tax obligations that are not always visible at the outset. At the beginning of this article, we asked: does your business sell to the United States? The more accurate question is: do you understand the tax implications of the way you sell, and in which states exposure has already arisen? Those who act early and in an orderly manner are usually in a better position to manage the exposure, rather than simply react to it.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law offices, and brings together legal and economic perspective. We advise private and public companies, Israeli and foreign businesses, global venture capital funds, and clients seeking focused advice in clear, practical language. We also work with a professional network of accounting and law firms around the world in order to provide full support in cross-border matters.

If your business has sales, inventory, customers, or ongoing activity in the United States, now is the time to examine whether state tax exposure has already arisen. An early and accurate review of Nexus and reporting obligations can reduce uncertainty, improve preparedness, and sometimes prevent costly mistakes later on. We would be pleased to assist with a specific review of your current position, exposure mapping, and tailoring the right course of action for your business.

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