This is a translation of the French article published in Maddyness by Chloé Le Nignol. Click here to read the original version.
The United States does not have a VAT system like Europe. Instead, a "sales tax" is applied when goods or services are sold on U.S. soil. To help Europian entrepreneurs successfully expand into the U.S., Maddyness explains this unique system.
In the U.S., a taxation system similar 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'. This issue therefore affects both companies based in the U.S. and in France.
However, many companies are not compliant with this, usually due to a lack of knowledge. "Sales tax is very specific, many people do not master this 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.
Sales Tax vs. VAT: The Major Differences
This 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, with the possibility of businesses to recover 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.
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.
"In terms of sales tax, the difficulty lies mainly in the implementation. Since everything is decided at the local level, it is impossible to manage this manually. New Jersey, for example, applies a single rate throughout the state, while in Colorado, the rates can vary from one city to another and even from one street to another. It is therefore necessary to have a project manager and tools to manage this," explains Yoann Brugière. The two leading tools on the market today are Avalara and Tax Jar.
Orbiss' Advice: Start a U.S. Company
For Orbiss, the basic rule is to register with the U.S. government as soon as a company sells to end users on U.S. soil. As soon as you make a certain number of sales, it is relevant to create a US company and ensure that the sales go through the US company," says Yoann Brugière.
"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 we start to take charge of this subject, 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 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. “However, in terms of costs, companies would gain a lot by anticipating this subject.”
“Not to mention the hidden costs, in terms of time spent deconstructing things that have been built." Fabien Messina adds, "The registration process is not technically complicated, but in my opinion it is more interesting, in terms of costs and time spent, 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 interesting to internalize this function, and to use a company like Orbiss, as support on technical subjects," adds Yoann Brugière.
Sales Tax: A Subject Too Often Overlooked
"I am surprised by the number of accounting directors of startups who are not at all compliant with sales tax standards, and some of whom are not even aware of the subject," wonders Fabien Messina. "It is a risk often overlooked by French companies and generally non-American companies, particularly in e-commerce and software, because their model does not have 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 illustrates.
It is important to be aware of the obligations and risks associated with breaches, and to implement the right tools with the support of experts . "A word of advice: start finding out from the first euro invoiced in the US. Even if things are not put in place straight away, at least we can anticipate them," concludes Fabien Messina.