B2B Digital sales in the USA: Sales and Use Tax Perspective
Sales tax
There’s no state in the US where B2B digital sales are categorically exempt from sales tax.
B2B sales of digital products can be taxable depending on the product and the state’s specific regulations. In some cases, products sold for resale might be exempt, but products used directly by the buyer (e.g., software licenses or subscriptions) often are taxable. For cross-border sales – taxable Jurisdiction for sales tax is where the customer is. For digital sales Seller can use the billing address of the customer as a customer address to determine a tax rate.
Reason for purchase matters
For sales tax purposes, it makes no difference whether your buyer is a business or an individual. The main difference is what this software is purchased for (subscription or another type of digital service). So, if the software is purchased for further resale and will not be used by the buyer, the buyer can issue an exemption certificate (resale certificate) and such a sale will not be subject to sales taxes.
States where there are exceptions
It is also necessary to note that not in all states where there is a sales tax, sales of digital services are subject to taxation. In some states, such services are not subject to sales taxes. For example, in Florida, a subscription to the use of software is not subject to sales taxes. This means that if your buyer is in the state of Florida, you do not need to ask him for a certificate even if he is purchasing it for resale. Any subscription sold to a buyer in Florida will not be subject to sales tax. You can view a complete list of states with such an exception here.
Use tax
Use tax is the same as sales tax but applied reverse charge – that means, by the buyer. This situation, for example, arises when the seller does not have sales taxes registration in the buyer’s state. This can happen if the seller has not yet reached economic nexus in the state and is not required to register for sales taxes. In this case, when purchasing software, the buyer will calculate a use tax and reflect it in his sales tax return as use tax.
Nexus in a State
There are several pieces of evidence that business needs to register for sales tax in the state:
- Business have a physical nexus: for example office, employee, or goods stored in a warehouse.
- Busines have an economic nexus: The Wayfair decision established that a state can require a business to collect sales tax if it has economic nexus in that state, even without a physical presence. Economic nexus can be triggered by exceeding a certain sales threshold or other forms of substantial economic activity within the state. For example: sales to customers in this state more than economic nexus threshold.
Do exempted transactions count towards economic nexus?
It depends on the specific state’s sales tax laws. Generally, if a transaction is not taxable in the State it doesn’t count towards economic nexus. But for transactions that are normally taxable and only exempted due to exemption certificates different states have different approaches. Some states may explicitly exclude exempt sales from nexus calculations, while others may consider them in conjunction with other factors.