Introduction: Why Sales Tax Nexus Catches UK Companies Owned by Americans
Sales tax nexus is the connection between a business and an American state that obliges the business to register, collect sales tax from customers and file returns in that state, and since 2018 a British company can create it without ever setting foot in the United States. If you are an American living in London, Edinburgh or the Home Counties and you own a UK company that sells to US customers, this is the cross-border obligation most likely to be sitting unnoticed in your accounts today.
The problem is not that the rules are hidden. Rather, they sit in fifty separate state codes, none of which your UK accountant prepares, and none of which the US-UK tax treaty touches. Your company files with Companies House and HMRC. You file your own Form 1040 and FBAR. Meanwhile, Texas, California and New York each keep their own count of what your company has sold into their territory, and each has its own threshold for when that count becomes a legal duty.
Consequently, many American owners discover sales tax nexus only when a marketplace sends a notice, a US distributor asks for a resale certificate, or a buyer's due diligence team asks for state registrations before an acquisition. By then, several years of uncollected tax can be outstanding, and the company cannot recover it from customers who have long since paid.
At TaxYork, we prepare US and UK returns for high-net-worth Americans in Britain, including founders and directors of UK trading companies. This guide explains how sales tax nexus arises for a UK company, which 2026 thresholds apply, how marketplaces change the picture, why the treaty does not help, and how the issue links back to your own American filings. Furthermore, it covers the personal liability that American directors often overlook, and the voluntary disclosure route that limits the damage when the company is already behind.
Sales Tax Nexus in One Paragraph
Put simply, sales tax nexus exists when a seller has enough connection with a state that the state may require it to collect tax. Historically, that connection meant physical presence: an office, staff or stock. Since the Supreme Court decision in South Dakota v. Wayfair, however, economic activity alone is enough. Therefore, a UK company shipping from Birmingham or selling software from Shoreditch can owe collection duties in a state where it has no employee, no lease and no bank account.
Why US Owners Abroad Face a Wider Problem
A British-owned UK company faces the same state rules. However, an American owner carries extra exposure. You personally file Form 5471 for the company, so its US activity sits inside your own return. You may sign its bank mandates, which brings FBAR into play. Additionally, several states can assess unpaid collected tax against the individuals who control the business. As a result, an uncorrected sales tax nexus position is not simply a company issue for an American director. It can follow you personally.
How Sales Tax Nexus Arises for a Company Based in Britain
There are two routes into a state's tax net, and a UK company can trigger either without intending to. Understanding which one applies decides whether you have a single obligation or a cluster of them.
Physical Presence Nexus
Physical presence remains the oldest and strongest form of sales tax nexus. Specifically, a state can require registration where your company has employees, an office, a sales representative who travels regularly, or inventory stored in the state. That last point surprises many founders. If you sell through a fulfilment programme, the marketplace decides which warehouses hold your stock, and every state containing one of those warehouses can treat your company as physically present.
Similarly, attending trade shows, sending contractors to install equipment, or employing a remote salesperson in Colorado can each create presence. Notably, there is no minimum sales level for physical presence. One pallet in a Pennsylvania warehouse can be enough, even if your Pennsylvania customers bought very little.
Economic Nexus After Wayfair
Economic nexus is the route that now catches most UK sellers. In June 2018, the Supreme Court upheld South Dakota's law requiring remote sellers to collect tax once they made more than $100,000 of sales, or 200 separate transactions, into the state in a year. Every state with a general sales tax has since adopted its own economic test.
Importantly, nothing in these laws distinguishes between a seller in Ohio and a seller in Oxford. The thresholds count sales delivered to customers in the state, regardless of where the seller is incorporated. Consequently, sales tax nexus can attach to a UK company that has never held a US entity, a US address or a US employee.
Services, Software and Digital Products
Not every sale is taxable, and nexus and taxability are separate questions. A state can treat your company as having sales tax nexus while the specific product you sell is exempt there. Software-as-a-service, downloaded content, online courses and professional services are taxed in some states and exempt in others. Furthermore, several states count all gross sales towards the threshold, including exempt ones, while others count only retail or taxable sales.
In our experience, this is where UK software founders go wrong. They assume a subscription product is outside the system because it is untaxed in Britain's export rules. Instead, the right approach is to map each product against each state's taxability rules, and then measure the threshold the way that state measures it.
Economic Nexus Thresholds in 2026: The Numbers That Matter
The headline $100,000 figure is a convenient rule of thumb, but it is not the law in every state. For a UK company with meaningful American revenue, the differences change which states require registration.
The $100,000 Standard and the Fading 200-Transaction Test
Most states follow the South Dakota model, under which sales tax nexus arises at $100,000 in annual sales. Originally, most also applied the alternative 200-transaction test, which caught businesses with many small orders. That second test is now disappearing. Illinois removed it from 1 January 2026, and Kentucky dropped it from 1 August 2026, leaving $100,000 of sales as the only economic trigger in both. Even so, a number of states, including Georgia, New Jersey, Ohio and Virginia, still apply a transaction count.
For a UK luxury brand selling a few hundred high-value items, the change rarely matters. For a UK company selling low-priced consumables or digital downloads, however, the remaining transaction tests can still create sales tax nexus long before revenue reaches $100,000.
The Higher Thresholds in the Largest States
The three largest economies use higher figures. California and Texas each set a $500,000 threshold, and the California Department of Tax and Fee Administration's remote seller guidance confirms that California counts total sales of tangible goods delivered into the state. New York requires both more than $500,000 of sales and more than 100 transactions, as set out in New York's sales tax guidance. Meanwhile, Alabama and Mississippi use $250,000.
Therefore, a UK company with $400,000 of Californian sales may have no Californian obligation yet, while $120,000 of Florida sales does create one. Similarly, the measuring period differs by state, with some using the previous calendar year, some the current year and some a rolling twelve months.
States With No Statewide Sales Tax
Five states have no statewide sales tax, so they create no state-level sales tax nexus: Alaska, Delaware, Montana, New Hampshire and Oregon. However, Alaska allows local governments to levy their own sales taxes, and many Alaskan municipalities now require remote sellers to collect through a central commission. Additionally, a missing sales tax does not mean a missing tax. Delaware and Oregon both levy gross receipts taxes, which we cover below.
Marketplaces, Customs Duty and the 2025 De Minimis Change
How you sell to America changes who collects the tax. It also changes the separate question of import duty, which many owners confuse with sales tax.
Marketplace Facilitator Laws
Every state with a sales tax now has a marketplace facilitator law. Under these rules, large online marketplaces collect and remit sales tax on sales they facilitate. If your UK company sells only through such platforms, the platform normally handles collection on those sales, even where your company has sales tax nexus in the state.
Nevertheless, three traps remain. First, marketplace sales usually still count towards your own threshold, so your direct website sales may push you over the line in a state where you assumed the platform covered everything. Second, some states, including Connecticut, still expect marketplace sellers to register and file returns. Third, stock held in marketplace warehouses creates physical sales tax nexus for the seller, which may also matter for state income and franchise taxes that marketplaces never pay on your behalf.
Sales Tax Versus Customs Duty
Sales tax is charged on the sale to the American customer. Customs duty, by contrast, is charged on the import of goods into the United States. They are entirely separate systems, run by different authorities, and paying one never satisfies the other.
The distinction became sharper in 2025. Under the July 2025 executive order suspending duty-free de minimis treatment, parcels worth $800 or less lost their duty-free entry from 29 August 2025, for goods from every country, including the United Kingdom. Congress has since legislated a permanent repeal of the statutory exemption from July 2027. Consequently, a UK company shipping directly to American consumers now deals with duty on every parcel, as well as sales tax wherever it has sales tax nexus. US Customs and Border Protection's e-commerce guidance explains the import side.
UK VAT on Sales to America
On the British side, the position is usually simpler. Goods exported from the UK to an American customer are generally zero-rated for VAT, provided you hold evidence of export, as explained in HMRC's VAT Notice 703 on exported goods. Many services supplied to American business customers fall outside the scope of UK VAT altogether. As a result, your UK VAT return may show nothing unusual, which is exactly why American sales tax goes unnoticed.
Why the US-UK Treaty Does Not Protect You From Sales Tax Nexus
American owners often assume that the US-UK income tax treaty shields their UK company from American taxes until it has a permanent establishment. That assumption is wrong for sales tax, and only partly right for income tax.
The Treaty Covers Federal Income Tax Only
The treaty, available through HMRC's collection of US tax treaty documents, applies to federal income taxes. It does not cover state sales taxes, because sales tax is a tax on transactions, not on income. Furthermore, the permanent establishment threshold, which protects a UK company from federal tax on business profits, has no bearing on sales tax nexus. A company can be fully protected from federal income tax under the treaty and still owe collection duties in twenty states.
If your company does have a US trade or business, you may need to consider a protective Form 1120-F claiming treaty benefits at the federal level. However, that filing does nothing for state sales tax.
Public Law 86-272 and State Income Taxes
States can also tax a company's income. A federal statute, Public Law 86-272, stops a state from imposing a net income tax where a seller's only activity there is soliciting orders for tangible goods that are approved and shipped from outside the state. That protection has real limits for UK companies. Its text refers to interstate commerce, and states disagree on whether it extends to sellers based abroad. Moreover, it never covers sales of services or software, and it does not apply to sales tax at all.
Gross Receipts and Franchise Taxes
Several states tax gross receipts instead of income, often using thresholds that mirror sales tax nexus, and the 86-272 shield does not reach them. Washington's business and occupation tax applies once a seller exceeds $100,000 of Washington receipts. Ohio's commercial activity tax now excludes the first $6 million of taxable gross receipts, so only larger sellers pay it. Texas applies its franchise tax to taxable entities with more than $500,000 of Texas receipts, although no tax is due below the revenue threshold, currently $2.65 million for reports due in 2026 and 2027. In short, the treaty, 86-272 and sales tax nexus are three separate questions, and each needs its own answer.
The Personal Exposure for American Directors and Owners
For most UK directors, an unpaid state liability is a company problem. For an American owner, it can become a personal one in two distinct ways.
Responsible Person Liability
States treat collected sales tax as money held in trust for the state. Consequently, many states can assess unpaid collected tax against the individuals who controlled the business. Washington, for example, holds a chief executive or chief financial officer liable for unpaid collected retail sales tax regardless of fault, as set out in the Washington Department of Revenue's guidance on personal liability. Other states apply a wilfulness test, but they look at control, not job title.
Importantly, this liability usually survives the company's insolvency or sale. If you wind up the UK company, or sell it, the state can still pursue the individual who decided which bills were paid first. Therefore, a director who lets sales tax nexus go unaddressed is personally exposed in any state where the company actually charged and kept the tax.
No Statute of Limitations Without a Return
The second exposure is time. In most states, the limitation period for assessment starts only when a return is filed. If your company never registered, the state can, in principle, look back to the date nexus first arose. For a company that crossed thresholds in 2019, that could mean seven years of tax, plus interest and penalties that can add a quarter or more to the bill. Moreover, the company usually cannot recover the tax from customers after the event, so every dollar comes out of profit.
How the Issue Reaches Your Own US Return
Your Form 5471 reports the company's income statement, balance sheet and earnings and profits. A material state tax liability, once recognised, changes those figures. Likewise, the company's tested income for the net CFC tested income regime, which replaced GILTI from 2026, is computed after deductible expenses, so a back-tax settlement can reduce your current inclusion. As a result, correcting sales tax nexus often goes hand in hand with reviewing your own US tax returns for expats, so that the company figures and your personal figures agree.
Registering, Collecting and Fixing Past Sales Tax Nexus
Once you know where your company has sales tax nexus, the work splits into forward-looking compliance and correcting the past. The order matters, because registering before you resolve the past can damage your negotiating position.
Registering a UK Company in a State
Each state where your company has sales tax nexus runs its own registration. Most ask for the company's officers, its registered address, its US sales history and a federal Employer Identification Number. A foreign company with no US owner holding a Social Security number cannot use the online EIN service, so it applies on Form SS-4 by fax, post or telephone. The IRS explains the process in its guide to getting an Employer Identification Number. Once registered, you file returns monthly, quarterly or annually, depending on the volume of tax collected.
Collecting the Right Rate
America has thousands of local sales tax jurisdictions, and most states where you have sales tax nexus tax remote sales at the combined state and local rate of the delivery address. Consequently, the rate on one order to Chicago differs from the rate on the next order to a Chicago suburb. In practice, UK companies selling through their own website use rate-calculation software linked to their checkout, and collect exemption or resale certificates from American business customers who buy to resell.
Voluntary Disclosure Agreements
If your company has had sales tax nexus in a state without registering, a voluntary disclosure agreement is usually the best route. Under a typical agreement, the state limits the look-back period, commonly to three or four years, and waives most or all penalties. In return, the company comes forward before the state contacts it, pays the tax and interest for the look-back years, and registers going forward.
Timing is critical. Most states refuse a voluntary disclosure once they have already contacted the business, for example through a nexus questionnaire. Furthermore, many states allow the initial approach to be made anonymously through a representative, so you learn the terms before revealing the company's identity. In our experience, that anonymity is the main reason to resolve historic sales tax nexus before registering, not after.
Your Own Missed Filings
A sales tax review often uncovers personal reporting gaps. Owners who control the company's UK bank accounts have a financial interest in them and must include them on the FBAR when the aggregate value of foreign accounts exceeds $10,000, as FinCEN's foreign account reporting page explains. If the company holds a US subsidiary or a single-member LLC, Form 8858 may also apply. Where those returns are missing, our FBAR and FATCA reporting service puts them right alongside the company work.
Case Study: A Surrey Leather-Goods Company With Five Years of US Sales
The following example is illustrative and simplified, but it reflects the pattern we see repeatedly in our work with American founders of UK companies.
The Background
Daniel is a dual national US UK citizen living in Surrey. He owns 100% of a UK limited company that makes premium leather bags and sells them through its own website and a large online marketplace. American customers account for $3.1 million of the company's $7.4 million annual turnover. The company also stores stock in three marketplace warehouses, in Arizona, Pennsylvania and New Jersey. It has never registered for any US state tax.
Daniel files his own Form 1040, Form 5471 and FBAR every year. However, nobody had ever asked whether the company had sales tax nexus. The question arose only when a US private equity buyer's due diligence team requested evidence of state registrations.
The Numbers
We mapped five years of sales by state to test sales tax nexus in each one. Marketplace sales, about 55% of US revenue, were already covered by marketplace collection. Direct website sales, however, were not. The company had crossed thresholds through direct and marketplace sales combined in eleven states, plus physical presence in the three warehouse states. Direct website sales into those fourteen states totalled about $1.2 million a year.
At an average combined rate of 7.9%, uncollected tax was roughly $95,000 a year. Over five years, that came to about $474,000 before interest. With interest and typical failure-to-file and failure-to-pay penalties, the potential exposure approached $640,000. Moreover, a further $85,000 of Washington business and occupation tax and Texas franchise reporting needed review. Notably, Daniel personally signed every payment run, which put responsible person liability squarely in view.
The Resolution
We approached the states anonymously through voluntary disclosure. Twelve of the fourteen states agreed a three-year look-back, and two agreed four years. All waived penalties. As a result, the company paid about $301,000 of tax and $27,000 of interest, a saving of more than $310,000 against the full exposure. The settlement was deductible for UK corporation tax at 25%, reducing the net UK cost by around $82,000.
On the US side, the settlement reduced the company's earnings and profits and its tested income, which we reflected on Daniel's Form 5471. We also found that one UK deposit account in the company's name had been left off his FBAR for two years, and corrected it with a late filing and reasonable cause statement. Ultimately, the buyer accepted a reduced escrow of $150,000 instead of the $700,000 it had first demanded, because the liability was quantified and closed.
How TaxYork Can Help
TaxYork prepares US and UK tax returns for high-net-worth Americans in Britain, including founders, directors and shareholders of UK trading companies. When a UK company sells into America, we start with a state-by-state sales tax nexus study, measuring sales, transactions and physical presence the way each state measures them. We then quantify the historic exposure, approach states anonymously through voluntary disclosure where it pays, and register the company for ongoing collection.
Crucially, we connect that company work back to your own filings. We prepare your Form 1040, Form 5471, FBAR and Form 8938, and align them with the company's restated figures. Where the review reveals missed FBAR filings, missed US tax returns or missed reporting on UK pensions, ISAs or investment accounts, we correct them in the same engagement. Where treaty questions arise, our US-UK tax treaty optimisation service reviews the federal permanent establishment position and any protective filings.
Conclusion
Sales tax nexus is now created by sales, not by offices, and a UK company with American customers can owe collection duties across a dozen states without any US presence at all. The thresholds differ, with $100,000 in most states, $250,000 in Alabama and Mississippi, and $500,000 in California, Texas and New York, and the 200-transaction test is fading but not gone. Marketplace collection helps, but it rarely covers everything, and it never covers the stock in your marketplace warehouses.
For an American owner, the stakes are higher than for a British peer. The treaty offers no protection, responsible person rules can reach you personally, and the company figures run straight into your own Form 5471 and FBAR. Therefore, the right time to review sales tax nexus is before a marketplace notice, a state questionnaire or a buyer's due diligence forces the issue. A voluntary disclosure made early usually costs a fraction of an assessment made late.
Contact Us
If your UK company sells to American customers and you have never checked its state position, book a consultation with our US-UK team. We will map your sales by state, quantify any exposure, and align the company work with your own US and UK returns.
Email: hello@taxyork.com | Phone: 020 3488 8606 | Website: https://www.taxyork.com
Disclaimer
This article is for general information only and does not constitute tax or legal advice. State sales tax thresholds, taxability rules and voluntary disclosure terms change frequently and differ between states, and their application depends on your company's specific facts. The case study is illustrative and simplified, and the figures are approximate. You should obtain professional advice tailored to your circumstances before acting on any information in this article. TaxYork accepts no liability for any loss arising from reliance on this content.