Tax Compliance Guide for Cross-Border Sellers: An In-depth Analysis of the US Tax System

When operating in the global market, cross-border sellers must be familiar with the tax policies of various countries, especially the United States, whose tax system is complex and varies significantly from state to state. Once tax evasion is discovered, not only will they face government audits and collection, they may also be transferred to the Department of Justice or even face imprisonment. Therefore, tax compliance is crucial when operating in the United States.

Overview of the U.S. Tax System

The U.S. tax system consists of three levels: federal, state, and local, with various types of taxes, including personal income tax, corporate income tax, social security tax, estate tax and gift tax, and consumption tax.

With regard to corporate income tax, there are differences between the federal and state systems, with the federal government applying a uniform 21% tax rate, while the states have their own rates and tax structures.

Main types of taxes involved in cross-border transactions

According to US tax laws, Chinese cross-border e-commerce sellers mainly need to pay corporate income tax and state sales tax. Although some states do not levy corporate income tax, companies still need to pay attention to the total amount of income.

As long as a company opens a store in the United States or has activities such as payment collection, it must declare corporate income tax. Even if there is no profit this year, it must declare zero.

1) Payment Guidelines

• The corporate income tax in the United States is federal + state, which means it needs to be paid twice. The federal tax rate is 21%, and the state tax rate varies from state to state, roughly between 0% and 10%;

  
  

• Six tax-free states: Nevada, South Dakota, Texas, Washington, Wyoming, and Ohio;

2) Interstate corporate income tax payment

• Is there an "economic connection"?

  First, states must determine whether a business has sufficient “economic nexus” to determine whether it is subject to corporate income tax. Economic nexus includes a physical presence or economic activity in the state.

  
  

• Determine total taxable income

  In addition, whether interstate corporate income tax is generated is determined based on the amount of taxable income generated within the state and the specific regulations.

  For example, in Hawaii, if a company's total revenue exceeds $100,000 or the number of orders reaches 200, it must file income tax in the state.

Regardless of whether a company is registered in the United States or China, as long as it engages in e-commerce in the United States, it must collect sales tax on behalf of consumers. The U.S. sales tax is a state tax, which is jointly levied by the state government and the local governments under its jurisdiction, and the tax rates vary significantly from state to state.

1) Tax rate principle

There are 52 states in the United States (including the Special Administrative Region). Each state has different remote sales limits and different time periods for paying remote sales taxes. There are two tax rate application principles: the tax rate at the consumer's place of receipt and the tax rate at the seller's place of shipment. For remote sellers, most states apply the principle of the place of receipt.

The following is a detailed diagram of the various taxation principles:

However, it should be noted that five states, including Alaska, Delaware, Montana, New Hampshire and Oregon, have no state sales tax, and only Alaska allows local sales taxes to be levied.

2) Interstate sales tax

When interstate transactions occur, most states in the United States collect comprehensive sales taxes based on the location of the consumer. For example, if the consumer is located in Washington State, Washington State's comprehensive sales tax will be collected. However, California, Texas, Arizona and other states implement sales tax rates based on the place of shipment.

Corporate Compliance and Tax Response Strategies

How should Chinese cross-border e-commerce companies deal with the complexity of the U.S. tax system? Here are some tax compliance strategies:

Do tax planning in advance and choose the right state to register and operate in to take advantage of tax incentives.

Seek professional tax advice to ensure compliance and reduce tax risks.

Streamline the process and reduce errors and delays by using an electronic tax filing system.

Pay close attention to IRS extension policies and ensure that tax returns are completed within the specified time.

Understand and take advantage of state tax incentives such as tax credits, accelerated depreciation, and R&D tax credits.