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By: Rashtin Fazal, Michael Catterall, Richard Nutt, Mark Foster
12 Jun 202612 min read
The US market offers Australian retailers access to a large, highly-developed consumer base. For businesses with proven domestic models, expansion can unlock meaningful scale and revenue opportunities. With a consumption-forward population and significant commonalities in language and culture, the US is undoubtedly one of the most appealing markets for an Australian retailer.
However, high reward is often paired with high risk and complexity. The US tax and regulatory environment is no exception, differing fundamentally from Australia. Instead of a single, nationally administered system, retailers must navigate federal, state, and local tax regimes, each with their own rules and compliance requirements. While Australian businesses have had to adapt to an increasingly complex tax system, this layered system presents an entirely new level of challenge.
As a result, decisions around pricing, sales channels, fulfilment, and operating structure can have unintended tax consequences if not considered early. Understanding how these systems interact is critical to expanding successfully and avoiding unnecessary risk and cost.
US sales tax is often the first hurdle Australian retailers face, and one that many fail to clear in their early years of US sales, with remediation frequently required.
Unlike Australia’s centrally administered GST system, US sales tax is imposed at the state and local level. Rates, registration requirements, and compliance obligations vary depending on where customers are located and how sales are made.
A key driver of sales tax exposure is economic nexus. Following the landmark South Dakota v Wayfair decision, many states require remote sellers, including Australian-based businesses, to collect and remit sales tax once certain thresholds are exceeded.
These thresholds vary by state and may be based on revenue, transaction volumes, or a combination of both, with differing measurement periods and exclusions. As online sales grow, they can be reached relatively quickly.
In addition, taxability rules also vary by state, meaning that similar products may be taxable in one state and exempt or subject to different treatment in another.
Where a retailer fails to register and collect sales tax when required, state authorities may seek to recover the uncollected tax, interest, and penalties.
In many cases these amounts cannot be recovered from customers retrospectively, leaving the liability with the retailer. As sales volumes grow across multiple states, exposures can become material and costly to remediate.
From a commercial perspective, it is also worth noting that sales tax can also directly affect pricing, margin, and competitiveness, particularly where taxes cannot be passed on to customers or where compliance costs increase as scale is achieved.
As US operations grow, tax complexity naturally increases. State tax obligations generally arise where a business has a sufficient connection – or nexus – with a state. This can be triggered not only by sales thresholds, but also by holding inventory, using third-party logistics providers, or engaging US-based staff or contractors.
Where nexus exists in multiple states, retailers may need to comply with multiple tax regimes simultaneously. This can significantly increase administrative burden and compliance cost.
In addition to income tax, states may impose other taxes such as franchise taxes or gross receipts-based taxes, even where the business is not yet profitable.
Importantly, while the Australia–US tax treaty may reduce exposure to US federal income tax, it generally does not apply at the state level. As a result, state tax obligations can arise even where federal tax exposure is limited.
Australian retailers expanding into the US may become subject to US federal income tax depending on how their operations are structured.
Broadly, this will depend on whether the business operates through a US legal entity or conducts activities in the US directly from Australia.
For many Australian retailers, the US journey begins with e-commerce, a relatively simple and low-cost entry point. As sales grow, however, the question of whether to establish a more formal local structure becomes an increasingly important consideration, with on-the-ground operations offering greater scale but bringing the additional tax and compliance obligations outlined below.
Many retailers choose to establish a US subsidiary to support local operations. In this case, the US entity will generally be subject to US federal income tax on its profits.
From a commercial perspective, this model can provide greater operational flexibility, support local staffing and logistics, and simplify customer and supplier relationships.
However, it also brings ongoing obligations, including US corporate income tax filings, state and local tax compliance, and the need to allocate profits appropriately between US and Australian entities.
Even where no US legal entity has been established, Australian retailers can still be subject to US federal income tax.
Under the Australia-US tax treaty, this typically depends on whether the retailer has created a PE in the United States. PE risk is determined by the nature of activities performed in the US, rather than legal structure alone.
For retailers, common risk factors include:
Where a PE exists, profits attributable to US activities may be subject to US federal income tax, even where sales are made directly by an Australian entity.
Early assessment is important, as operational decisions such as fulfilment models, staffing, and contracting arrangements can unintentionally create US tax exposure.
Any business that operates cross-border is potentially exposed to multiple tax regimes and must navigate the risk of double taxation and ‘tax leakage’. Vigilance is required in both establishing and operating the business to ensure overall tax efficiency.
In practice, this means paying attention to a number of interconnected issues. Where a business is profitable in one jurisdiction but generating losses in another, those losses may not be able to offset taxable income across borders, resulting in a higher overall tax burden than expected. Similarly, withholding taxes on payments such as dividends, royalties, or interest between related entities can represent a real cash cost where full offset or credit is not available in the other jurisdiction.
For Australian businesses specifically, the value of generating franking credits by paying Australian tax should be weighed against the potential benefits of paying tax offshore at a lower rate. A lower tax rate overseas can yield a larger pool of cash to invest, supporting business growth. However, Australian tax may be fully creditable for Australian resident shareholders through the franking system, giving a highly tax-efficient outcome at the shareholder level. The structure and timing of profit repatriation therefore requires careful planning.
Both the US and Australian tax systems offer various incentives that can reduce overall tax cost. Ensuring the operating structure is positioned to access these where available, and taking advice on eligibility early, can meaningfully improve after-tax returns.
Early and ongoing attention to these issues, as part of an integrated cross-border tax strategy, can avoid unnecessary leakage and improve the overall efficiency of the business as it scales.
Once a retailer has established a level of activity in the United States, the focus shifts from whether US tax applies to how much profit is taxable there.
Transfer pricing governs how profits are allocated between jurisdictions based on where value is created. For Australian retailers expanding into the US, this means aligning returns with the functions performed, assets used, and risks assumed in each location.
In practice, this may involve:
Transfer pricing is particularly important where:
Failure to align pricing with the underlying business activities can increase the risk of audit adjustments, penalties, or double taxation across jurisdictions.
Recent changes to US tariff and customs settings have increased both cost and compliance obligations for Australian retailers.
In particular, Australian retailers should be aware that:
In practice, this means higher import costs and greater compliance risk, especially for direct-to-consumer models. The US has also indicated potential for further expansion of tariff measures, adding additional uncertainty to cross-border supply chains.
Shipping and delivery models have become increasingly important in light of these cost and compliance changes. The choice of fulfilment approach can directly affect pricing, customer experience, and margin outcomes.
One common approach is to ship goods on a Delivered Duty Paid (DDP) basis, where the retailer is responsible for shipping, duties, taxes, and import clearance. This allows customers to pay a single, all‑inclusive price at checkout and avoid unexpected charges on delivery.
While DDP simplifies customer experience, it does not remove US sales tax obligations that may arise from economic nexus or in-state activity. It can also shift greater cost and compliance risk onto the retailer. Retailers should consider:
Applying a DDP model in the US may also have broader implications across other export markets. In some jurisdictions, including the UK or EU, a DDP approach can result in the retailer becoming responsible for local duties and indirect taxes such as VAT or GST, potentially triggering registration, reporting, and ongoing compliance obligations. Retailers should consider whether a consistent global approach to Incoterms aligns with their broader indirect tax and customs strategy.
Expanding into the US market is an exciting step, but the tax and regulatory landscape can be complex to navigate. Our team of specialists at Grant Thornton understands both the Australian and US tax environments, and can help you structure your expansion efficiently, stay compliant, and avoid costly surprises. Reach out to find out how we can support your business.
Article contributed to by Lachlan Mackey - Specialist Tax
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