Fraud and taxation in the USA


Reflecting the payment usage mix, payment cards are the most prone to fraud in the US market. According to a TSYS survey in 2016, 42% of North American consumers felt that credit cards were safest for online purchases with PayPal coming in second at 26%. Overall, only 12% of consumers felt that debit card usage was safe.

Nielson estimated that, in 2012, the US accounted for 23.5% of the global payment card volume, but 47.3% of card fraud. The majority of this risk is down to the reliance on mag-stripe cards in the physical store environment. The introduction in 2015 of chip and pin (EMV) services, will bring down fraud levels in the cardholder present arena. However, it is increasing the pressure on online merchants as fraudsters look to capitalise on the card information they possess.

For example, ACI reported in November 2016 that they were expecting attempted online fraud levels to be 1.6% of total online transaction volumes, peaking at 2.6% on Christmas Eve.

US-issued cards rank highly in the fraud survey conducted by ACI Worldwide while other research carried out by the organisation also showed that 41% of US customers had experienced card fraud in the past five years. This further illustrates why merchants trading into the US need to have the appropriate fraud management tools in place while also looking at ways to give US consumers confidence in shopping with them.

Over 29% of all US ecommerce transactions in 2015 were conducted via a mobile device. This growth has not gone unnoticed by fraudsters, with an article by Bloomberg citing that 21% of all online fraud is perpetrated via a mobile device. While this is based on data from a LexisNexis report using a smaller mobile market share of 14%, the message still resonates.

In their 2015 Online Fraud Report, CyberSource report that the overall fraud rate was 0.9% of all ecommerce transactions. 81% of US merchants perform manual reviews and 27% of their online orders undergo this process. 3D secure (Verified by Visa and MasterCard SecureCode) isn’t in widespread use although most debit and credit cards can be registered.

TAKEAWAY: Merchants operating into the North American market would be advised to highlight acceptance of credit cards and provide PayPal as a payment option.


With over 12,000 taxing jurisdictions throughout the US, each empowered to alter rates and rules with little oversight, the complexity for companies trading in the US is a major challenge. In addition, 100,000+ rules and boundary changes annually make keeping up-to-date with the latest requirements difficult. This section provides a high-level overview, with more details available at

What is sales tax?

As an indirect tax (a tax levied on goods and services), sales tax requires the seller to collect funds from the consumer at the point of purchase. Currently, there are over 12,000 state, county and city jurisdictions in the US charging a sales tax. For some states, sales tax revenue is a major source of income. Five states do not have state-wide taxes, further complicating the picture.

Sales tax differs from Value Added Tax (VAT)

VAT is applied every time value is added at each stage during the supply chain, whereas sales tax is collected only at the time of the final sale.

If a seller has nexus in a state they must collect sales tax on all taxable sales regardless of the channel.

Just how complex is sales tax?

Depending on the state in which a customer is based, different items may be taxed at different rates.

In New York, clothing and footwear costing less than $110 per item / pair is exempt from state sales tax, yet it is still subject to local sales tax in some jurisdictions. Local jurisdictions can change their tax policy towards clothing once a year.

To be compliant, a retailer needs to know the correct classification of an item in each state to ensure it collects and remits the correct level of tax. Collecting too much in one state will make it uncompetitive, while not collecting enough increases its exposure to potential fines.

The risk of audit

In an effort to safeguard sales revenue, each state conducts audits of businesses, which may result in penalties and interest. Businesses must keep records of sales in each US city, county and state in which they sell.

An increase in audits of international business boosts revenues a state can make in penalties and unpaid tax.

Average audits cost as much as €79,000* ($100,000) so compliance is key. (*source: Wakefield Research)

Nexus: Do I have to collect US sales tax?

International businesses selling in the US are not required to collect sales tax in a state unless they have ‘nexus.’ Nexus is defined as a connection or business presence in a state or jurisdiction. If a business has nexus in a state, they need to collect and remit sales tax according to the state regulations. Activities leading to having nexus vary per state and can include activities such as opening offices, stores or franchises, storing items in warehouses or even attending meetings or trade shows.

Once you have determined where nexus exists for your business, you are required to calculate, collect, report and remit that state’s sales tax. For this reason, sales taxes are remitted based on where your business is actually located because it is the physical structure of the business that actually creates nexus.

What constitutes a ‘significant physical presence’?

Nexus rules are established by individual states and every state defines them uniquely. Determining exactly how a rule applies to a business is critical; the regular presence of a single sales person is enough to create tax nexus, therefore requiring the collection of sales tax.

Recently, in an effort to avoid losing taxes to companies that locate themselves in areas with low or no tax rates, many states have enacted Amazon laws to require more national and international online retailers to collect sales tax for the first time. These laws expanded definitions of nexus to include online-specific relationships such as affiliate and web advertising.

Top 8 areas to consider in your business plan for selling in the US

1. Keep up-to-date with each state’s tax requirements

2. Establish processes for record-keeping

3. Understand nexus requirements

4. Plan to use geolocation over zip codes

5. Set out a returns filing and remittance schedule

6. Collect and store all exemption certificates

7. Identify if the ‘Streamlined Sales & Use Tax Agreement’ is right for you

8. Plan for sales tax holidays

Whilst this section highlights some of the challenges that managing taxation exposure in the US involves, it should not detract from the opportunities that exist in the US market.

TAKEAWAY: Identify professional advice early on, perhaps utilising software to help your business record and account for US sales tax effectively.