Many Israeli companies enter the US market without understanding its complex tax system – and make costly mistakes | Get a quick guide to help you understand the requirements.
The US market is a huge opportunity for Israeli companies. With 330 million potential consumers, a familiar business culture, and a common language, it is a favorite destination for startups and companies of all sizes. However, one of the significant challenges that Israeli companies encounter is the complex US tax system.
From Israeli VAT to US Sales Tax
“The first key to success is to understand that the US tax system is fundamentally different from what we know in Israel,” explains Sky Dagan, CPO (Chief Product Officer) at Complyt, a company specializing in the automation of US tax processes. “While Israel has a flat VAT rate of 17%, in the US each state, city, and county can set tax rates In New York, for example, a company would have to charge 8.875% sales tax. In California, the rate can reach up to 10.75%, while in Delaware there is no sales tax at all.
But that’s only part of the story. In addition to sales tax, Israeli companies also have to deal with a flat federal income tax of 21% on corporate income, as well as state income taxes that vary from state to state. “It’s a common mistake to focus only on sales tax,” warns Dagan. “Companies need to consider the full picture of their tax liabilities.”
The Critical Moment: When Does Tax Liability Begin?
The most important step to success in the American market is to understand when exactly tax liability arises. The key concept to recognize is nexus – a connection to a state that requires tax payment. In the past, only a physical presence created a tax liability. Today, in the digital age, the situation has completely changed.
A company that has an office, warehouse, or employees in a particular state is required to start collecting sales tax immediately. However, companies that sell only online may also be liable for tax. Most states have set a threshold of $100,000 in sales or 200 transactions per year. In some states, the thresholds are different – California and New York, for example, have set a threshold of $500,000.
Easements and Solutions: Tools for Smart Dealing
One of the important tools that Israeli companies should be familiar with is a Resale Certificate. This certificate allows businesses to avoid paying tax on products intended for resale. “This is a particularly critical tool for wholesale businesses,” explains Complyt. “It allows you to maintain higher profitability and avoid double taxation.”
In addition, there are various options for strategic tax planning. For example, voluntary disclosure agreements (VDAs) allow companies to settle past debts on more favorable terms. “Although there are no special benefits for foreign companies,” notes Dagan, “there are legal tools that allow you to optimize the tax burden.”
Special Challenge: Employing Workers in the US
Israeli companies that employ workers in the US are required to deal with another layer of complexity: payroll taxes. These include Social Security, Medicare, unemployment tax, and federal and state income tax withholdings. “This is an area that requires special attention,” Complyt emphasizes. “Mistakes in payroll tax management can lead to significant fines.”
The key to success in this area is using advanced payroll systems that automatically update with legislative changes and handle all reporting and withholding obligations. It is also important to work with local payroll consultants who are familiar with the specific requirements of each country.
Digital Solutions That Will Give You Peace of Mind
Technology is the key to successfully dealing with the US tax system. Modern automation solutions provide much more than just tax calculations. They offer accurate tracking of sales in each country, alert you when thresholds are crossed, automatically update legislative changes, and generate customized reports.
Especially for SaaS companies and digital startups, the technology offers specially tailored solutions. Advanced systems know how to deal with the special classification of software products in each country, handle recurring subscriptions, and interface with existing billing systems.
One of the important lessons that Israeli companies have learned is the importance of comprehensive risk management and accurate documentation. “US authorities are very strict about documentation,” Complyt emphasizes. “Companies should keep detailed documentation of every transaction, every tax collected, and every decision made on tax issues.”
The solution includes conducting periodic audits, maintaining an organized documentation system, and ongoing work with expert tax advisors. It is essential to document the reasons for decisions on tax issues, in case of a future audit.
Keys to Success in the American Market
- Early planning: Start preparing at least a quarter before the start of sales
- Automation: Invest in systems that will save you time and errors
- Accurate tracking: Keep strict track of sales in each country
- Professional advice: Work with experts who know the market
- Ongoing updates: Stay up to date with legislative changes
- Comprehensive documentation: Keep accurate records of every action and decision
- Risk management: Conduct periodic reviews and prepare for changes
“Success in the American market is definitely possible,” concludes Dagan. “With the right preparation and the right tools, Israeli companies can focus on what they do best: develop great products and increase sales, without worrying about taxation. The key is in a combination of in-depth understanding, using the right tools, and working with experienced professionals.”
This article was co-authored with The-Founders.
