Israeli businesses operating with customers in the United States may be subject to sales tax or use tax if they sell products in the U.S. The rules governing the application of sales and use taxes in the U.S. can be complex for Israeli businesses, especially because the U.S. indirect tax system differs significantly from the Value Added Tax (VAT) regime in Israel.
As a general rule, sales tax applies when a seller has a sufficient connection to a particular U.S. state. This connection is referred to as “nexus.” By contrast, use tax may apply when sales tax was not collected. Unlike Israel, the U.S. does not have a single uniform sales tax rate. Each state sets its own rules, rates, exemptions, and reporting procedures, and local authorities may also impose additional tax.
What Is Nexus in the U.S.?
Nexus is the level of business connection to a U.S. state that gives that state the right to impose sales tax. Several factors can create nexus, and the main ones are:
- Physical presence in the state, such as an office, warehouse, or employees.
- Activities carried out through representatives or agents, including salespeople operating in that state.
- Meeting a certain monetary threshold (economic nexus). Many states use a threshold of $100,000 in gross sales, although the exact requirements vary from state to state.
For Israeli sellers, the concept of economic nexus is especially important. Following the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., states are generally allowed to require sellers to collect sales tax even if they have no physical presence in the state. This means that an Israeli company may be required to collect sales tax in the U.S. solely because it has reached a sufficient sales volume in a particular state.
How Can Israeli Sellers Determine Whether They Have Nexus?
Israeli sellers, like other foreign sellers, should first identify where their customers are located and track their annual sales volume in each state. If sales exceed the economic nexus threshold in a given state, the seller becomes obligated to collect sales tax in that state.
Sellers that use distribution centers, warehouses, or marketplace platforms in the U.S. should also examine whether these activities create physical nexus. Once nexus is established, sellers must collect sales tax and remit it to the relevant state. This is particularly important for Israeli e-commerce businesses that store inventory through fulfillment providers such as Amazon FBA or other third-party logistics operators in the U.S. Even if the seller has no office or employees in the U.S., inventory stored in a particular state may create tax obligations.
A practical first step is to conduct a state-by-state nexus review before sales volume grows. This can help Israeli businesses avoid late registration, retroactive exposure, penalties, and interest, while also supporting more accurate pricing and sound operational planning.
Sales Tax
Sales tax is an indirect tax imposed on the sale of tangible goods and, in some cases, certain services. It is generally calculated as a percentage of the purchase price and added to the final amount paid by the customer. Sales tax is a transparent mechanism through which U.S. authorities collect tax revenue. The rate varies from state to state and, in many cases, also by county, city, or other local jurisdiction, each of which may impose its own sales tax to generate additional revenue.
As of today, 45 states and Washington, D.C. impose a statewide sales tax, while Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose such a tax. In addition, 38 states also allow the imposition of local sales taxes, which in some cases may cause the combined rate to exceed the state’s general sales tax rate.
The table below presents illustrative examples of state-level sales tax rates and combined sales tax rates in several key U.S. jurisdictions:
Jurisdiction | State Sales Tax Rate | Combined Sales Tax Rate | Notes |
California | 7.25% | May exceed 10% in some jurisdictions | Local taxes may significantly increase the total rate. |
New York State | 4% | 8.875% in New York City | The combined rate in New York City includes both state and local taxes. |
Texas | 6.25% | Up to 8.25% | Local taxes may increase the total rate, depending on the area. |
It is also important to determine whether the product being sold is taxable at all. Some states tax digital products, software, or Software as a Service (SaaS), while other states exempt them or apply different rules. Similarly, certain products, such as groceries, medical equipment, or manufacturing equipment, may qualify for an exemption depending on the relevant jurisdiction.
Another practical topic that is often important for Israeli importers and sellers is the resale certificate. A resale certificate generally allows a business purchasing products for resale to buy them without paying sales tax at the time of purchase, because the tax is expected to be collected from the end customer. When used properly, a resale certificate can help prevent double taxation and reduce unnecessary cash flow costs. However, the rules in this area are technical, and the certificate usually must be properly completed, retained, and, in some cases, tailored to the specific requirements of the relevant state.
Use Tax
Use tax is a tax imposed on the use, storage, or consumption of goods and services that were purchased without sales tax having been paid.
As a general rule, the obligation to pay use tax falls on the consumer. For example, if a consumer buys a taxable item online from a seller located in Oregon—one of the five states that do not impose sales tax – and then brings, stores, or uses the item in a state that does impose sales tax, the consumer will generally be responsible for reporting and paying use tax in their state of residence. In most cases, the use tax rate is the same as the applicable state and local sales tax rate.
In other words, if sales tax was not collected at the time of the transaction, use tax is intended to produce the same result. Therefore, the use tax rate is generally the same as the sales tax rate that would have applied to the same transaction in the same state or local jurisdiction. For example, when the relevant combined sales tax rate is 8.875% in New York City or 8.25% in certain areas of Texas, the use tax rate will generally reflect that same combined rate.
Israeli businesses should be aware that use tax is not relevant only to private consumers. A business that purchases equipment, samples, software, or other taxable items for use in a U.S. state, without paying sales tax, may also be exposed to use tax. This issue often receives insufficient attention in cross-border operations, but it may arise during a U.S. state tax audit.
Differences Between the States
In addition to setting their sales tax rates, states and local jurisdictions may also grant sales tax exemptions for certain goods or services. These exemptions vary from state to state. For example, California exempts many essential items from sales tax, including most grocery products, prescription drugs, medical devices, and food purchased through government assistance programs such as food stamps.
Understanding how sales tax and use tax work together can help both consumers and sellers comply with U.S. tax rules. For Israeli investors, entrepreneurs, and growing businesses, proper planning can reduce tax exposure, improve profit margins, and support a smoother entry into the U.S. market.
TaxLink – Our Story
TaxLink is an accounting firm with a team specializing in both U.S. and Israeli taxation. Our practical experience working with the U.S. Internal Revenue Service (IRS) and the Israel Tax Authority, together with a deep understanding of how the two systems interact, allows us to build an end-to-end solution tailored to your specific case.
Most clients who approach us do so because they are required to file in the U.S., whether this involves Form 1040, Foreign Account Tax Compliance Act (FATCA) reporting, Report of Foreign Bank and Financial Accounts (FBAR) reporting, or real estate investments in the U.S. We manage the entire process as one coordinated cross-border matter, with the goal of reducing errors, preventing duplication, and helping avoid double taxation, all within the framework of U.S. law, Israeli law, and the tax treaty between Israel and the United States.
FAQ
What is the main difference between sales tax and use tax?
Sales tax is collected by the seller at the time of purchase and added directly to the price of a taxable product or service. By contrast, use tax applies when sales tax was not collected at the time of purchase, and it typically arises in interstate transactions or online purchases.
Where can I find the sales tax rates, the taxes applicable in each state, and the relevant rules?
Current sales tax and use tax rates, together with relevant exemptions, can be found on the website of each state’s Department of Revenue.
What penalties may apply if tax is not paid when there is an obligation to pay it?
Failure to pay tax may result in penalties, interest, and even audits conducted by that state’s tax authority.
