American sales tax on Israeli SaaS - when it touches you, and why Paddle solves it
Sooner or later it reaches every builder selling to the US: a client asking "do you collect sales tax?", a frightening post about thresholds and states, or simply a night of googling. The panic is understandable - the US has no single federal VAT, it has fifty states each its own tax world, and since the Wayfair ruling they may reach out to sellers with no physical presence at all. The good news: most Israeli builders have one simple solution that takes the whole subject off the table, and if you sell through a Merchant of Record you are probably already using it. Let us sort it out, without panic and without neglect.
What sales tax is - and why it is not an "American VAT"
The first thing to understand: there is no federal sales tax in the US. Sales tax is a state tax (and sometimes municipal or county tax added on top), and each state decides everything for itself - whether there is a tax at all, what it applies to, at what rate, and when you file. There are states with no sales tax at all, and in most of the others the combined rate (state plus local additions) is single-digit. Fifty states, fifty rulebooks.
Specifically regarding software: not every state taxes SaaS at all. Some states tax software as a service and digital products, some exempt them, and some draw fine distinctions - B2B versus B2C, downloaded software versus cloud software. As of 2026, the order of magnitude is that more than twenty states tax SaaS in one form or another - and the list moves every year, as states look for new revenue precisely in the digital economy.
The most important point in this guide: sales tax is not a tax on your profit. It is a tax the customer pays, and you are only the collection channel - you collect at checkout and remit to the state. The risk for anyone who does not handle it properly is not "double tax on income", but something more annoying: tax you were supposed to collect from customers and did not collect becomes your debt, out of your own pocket, plus interest and penalties. Other people's tax that you pay. That is exactly what we are preventing.
Economic nexus: how Wayfair changed the rules
Until 2018 a simple, convenient rule applied to remote sellers: a state could require you to collect sales tax only if you had a physical presence there - an office, an employee, a warehouse. An online seller with no feet on the ground was out of the game. Then came the Supreme Court's decision in South Dakota v. Wayfair, which turned the tables: states may impose a liability based on economic presence - economic nexus - meaning the sheer volume of sales to customers in that state.
Since then, almost every state that has a sales tax has adopted economic nexus thresholds. The typical pattern:
- An annual per-state sales threshold - in most states around $100,000 of sales to customers in that state per year (some states have higher thresholds, mainly the large ones).
- A transaction-count test - some states hold (or held; many have repealed) a threshold of a few hundred transactions a year, which a SaaS with cheap subscriptions can cross surprisingly fast.
- The count is per state, per year - crossed the threshold in Texas? A registration obligation arose in Texas. California is a separate calculation, New York another, and so on.
And now the part relevant to you: these rules apply to "remote sellers" wherever they are - including an Israeli business with no American entity at all. The nexus is created by the sale into the state, not by the seller's passport. An osek murshe from Rehovot selling $150,000 a year of SaaS to customers in New York is, on paper, in exactly the same box as a startup from Austin.
Why most Israeli builders need not lose sleep
Here is the secret hiding behind most of the panic: if you sell through a Merchant of Record - Paddle, Lemon Squeezy and their peers - the whole previous section is simply not about you. In a MoR structure the foreign company is the official seller of the product to the end customer: it is the one appearing on the charge, it is the one obliged to register and collect - and it is the one registered in the states, collecting the sales tax at checkout, filing the reports and remitting the money. The nexus is examined at it, not at you.
You, for your part, sell to one client - a foreign corporation - and receive periodic payment from it. You have no direct American customers, no thresholds to monitor, no fifty states. And this is not a bug, it is exactly the deal: the relatively high MoR fee buys, among other things, this entire global tax apparatus - sales tax in the US, VAT in Europe, GST in Canada and Australia. It is one of the main reasons we recommend most builders start with a MoR, as detailed in the Merchant of Record guide.
A two-minute check worth doing: go into your MoR dashboard and see it with your own eyes - on every American transaction there is a tax line collected from the customer according to their state. It has been happening for you since day one, without you configuring anything. When someone asks you "but who handles your sales tax?" - the answer is there, in that line.
Selling directly? It is on you - here is the list
And what if you are not in a MoR structure - for example selling on Stripe through an American entity, or processing directly? Here there is no wizard in the middle: you are the seller of record, and the entire compliance apparatus is yours. This is what it looks like:
- Monitoring thresholds by state. Ongoing tracking of sales volumes and transaction counts in each state, so you know when a new registration obligation arose.
- Registration. In every state where you crossed the threshold, you register with the state tax authority and receive a collection licence. State by state.
- Collection at checkout. Calculating the right tax according to the customer's address and the product type, and adding it to the charge - this is where the automated tools come in.
- Filing and payment. Every state with its own forms, frequency and deadlines - there are monthly, quarterly and annual ones.
- B2B and exemption certificates. Certain business customers are exempt (for example for resale) - but only if you collected and kept valid exemption certificates. Managing the certificates is a small profession in itself.
The good news: there are excellent tools - Stripe Tax, Anrok, TaxJar, Avalara - that do the calculation, the collection and the threshold alerts almost automatically. The less good news: the tool calculates, but the responsibility stays yours - the registrations in the states and the filings are still yours or your American CPA's (some tools offer filing services too, for an additional fee per state). That is a real cost line to factor in when doing the Stripe-versus-MoR math - the fee gap finances, among other things, this work.
A mistake we meet: a builder who opened an American entity "for Stripe", connected a checkout - and activated no tax mechanism because "it is still small". The problem: the liability does not wait for you to notice. If you moved to direct processing, the sales tax mechanism (even if it is only threshold monitoring at first) is part of the setup - not a future upgrade.
The Israeli side: what is recorded and what about VAT
And after all of America - home. Two points worth closing in the Israeli books:
- Collected sales tax is not your income. Whoever collects tax from American customers (in direct selling) is holding the states' money on its way to them - it passes through the balance sheet as a liability, and the income is recorded net, without the tax component. For MoR sellers this does not even arise: your income is the reconciliation with the MoR anyway, after it already handled the end customers' taxes.
- And against all of that, Israeli VAT is actually smiling at you. A sale to foreign customers is an export of services, which in most cases is entitled to zero-rate VAT - subject to the conditions and the documentation. That is: you do not collect Israeli VAT (18%) from the foreign customer, and you continue to deduct input VAT. Note the pleasant symmetry: the US wants you to collect tax from its customers, and Israel forgoes VAT on those same sales. Each country collects at its own end - neither is supposed to collect twice.
| How you sell | Who handles American sales tax | What stays with you |
|---|---|---|
| Through a MoR - Paddle, Lemon Squeezy | The MoR: registration, collection, filing and payment in all the states | Nothing on the American side; in Israel - recording the MoR income and zero-rate VAT |
| Stripe through an American entity | You (with the help of Stripe Tax / Anrok and an American CPA): monitoring, registration, collection and filings | The whole list from section 4 + the double reporting of the American structure |
| Direct processing from Israel (PayPal, an Israeli processor) to US customers | You - the rules apply to a foreign seller too; below the thresholds there is no registration obligation | Documenting sales by state and tracking the thresholds; in Israel - the ordinary routine |
A licensed Israeli CPA (license no. 500125101) accompanying businesses and self-employed clients across Israel - including founders, builders and owners of digital products. Bookkeeping, filings to the authorities, annual reports and personal financial guidance. About Adir →
Official sources
- South Dakota v. Wayfair (2018) - the US Supreme Court decision that created economic nexus
- Streamlined Sales Tax - official information and central registration for remote sellers in member states
- Stripe Tax - official documentation: calculating and collecting sales taxes
- Paddle - What is a Merchant of Record (who the seller of record is and what it means for taxes)
- Value Added Tax Law - Section 30(a)(5): the zero rate on exported services (Hebrew)
The information in this guide is general only, current as of August 2026, and does not constitute tax advice or a substitute for professional advice fitted to your business's circumstances. It is a condensed adaptation of our fuller Hebrew guide. For personal advice - talk to us.
American sales tax - the questions everyone asks
I sell from Israel with no American entity - can the US really charge me?
The liability itself does not ask for a passport: economic nexus is created by the volume of sales into a state, including for a foreign seller with no presence in the US at all. In practice, an American state's ability to enforce against a small Israeli business with no US assets is limited. But "hard to enforce" is not a plan: the debt accrues quietly and raises its head at exactly the expensive moments - due diligence ahead of a raise or an exit, opening an American entity, or an enterprise client demanding compliance certificates. The clean solution for most builders: sell through a MoR, and the whole question comes off the table.
Is Stripe Tax enough to be compliant?
Not on its own. Stripe Tax does the computational part excellently: it identifies the customer's location, determines whether the transaction is taxable, calculates and collects at checkout, and alerts you as you approach thresholds. But it does not register you in the states and does not file reports for you by default - the registration and filing remain your responsibility, usually through an American CPA or dedicated filing services for an extra fee. Think of it as a sophisticated tax calculator: it calculates precisely; it does not file.
What about Europe, the UK and Canada?
The same story in a VAT/GST version: the EU requires VAT collection on digital sales to consumers according to the customer's country (with a central registration mechanism, OSS/IOSS, for sellers), the UK has its own VAT system, and Canada has federal GST/HST plus provincial taxes. Selling through a MoR? It handles all of these exactly as it does American sales tax. Selling directly? Every territory is a separate registration and filing project. The more global the sales, the greater the MoR's advantage.
My revenue is small - when should I even start thinking about this?
If you sell through a MoR - never; that is precisely the deal. If you sell directly: below the thresholds there is no registration obligation, and most small builders are far from them - the typical thresholds are around $100,000 of sales a year to a single state, not to the whole US together. The moment to stop and check is when American revenue approaches that order of magnitude in the large states, when you are considering an American entity, or when enterprise customers come in asking tax questions. In any case, documenting sales by state from today is cheap, and reconstructing it in hindsight is expensive.
Should the price to the American customer include the sales tax?
In the US the practice is the opposite of Israel: the price is displayed without tax, and the sales tax is added at checkout according to the customer's location - Americans are used to this and do not raise an eyebrow. With a MoR it happens automatically: the same base price, and the system adds each customer their own state's tax. In direct selling you configure this in the tax tool (tax-exclusive). What you do not do is swallow the tax inside a uniform price - that way you are financing out of your own pocket a tax that is supposed to be collected from the customer.