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What is the difference between sales tax and use tax?
We receive many questions regarding sales and use tax. We have included many of the questions and answers below. These answers are general and each state has different provisions. You should consult with a tax or business advisor for specific assistance. We also provide sales tax consulting services. Please contact us here.
Currently 45 states plus the District of Columbia impose a general sales tax. The five states without general sales taxes are: Alaska, Delaware, Montana, New Hampshire and Oregon. However, Alaska permits local sales taxes. Delaware imposes a rental and service tax. Most of the states also impose different excise, meal or lodging taxes even though they don’t impose a general sale and use tax. Most states also impose a variety of local sales taxes including county, city, and transit taxes.
Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting the tax on sales in the state. Nexus is created if your company maintains a temporary or permanent presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses). The temporary presence is created through traveling people visiting states to call on customers or prospects, trade show attendance, or consigned inventory in warehouses. Nexus is created once a substantial physical presence is established. Unfortunately, this is not clearly defined by each state and can vary from 1 day to a number of days in other states. Nexus means a business entity has established a direct or representational presence within a particular state or jurisdiction. This presence gives the state the right to require a company to pay or collect and remit certain taxes.
You are responsible for collecting and remitting sales tax to a jurisdiction if you have established substantial presence in the state of delivery. Once established, you have created nexus. The threshold for this presence differs from state to state and a company’s presence in each state should be examined to determine if nexus has been established or not. A company clearly has nexus if there is a business location or there are employees living in or working in the state/jurisdiction. Once you establish nexus, you are required to register as a retailer with each state before collecting sales tax for that state.
The sales tax is imposed on retail transactions. It applies to all retail sales of tangible personal property, and in some states services, in the state. The use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Consumer’s use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales. Sales and Use tax generally applies to most leases of tangible personal property. The sales tax and the use tax are "mutually exclusive", which means either sales tax or use tax applies to a single transaction, but not both.
When making a sale, do you collect tax for the state that you are located in or the state where the customer is located?
You collect the tax for the state where the property is delivered to your customer. If the item is shipped to the customer, then tax applies for the delivery state. You should collect the tax only if you are registered to collect tax in that state. If the customer picks up the item at your location, tax should be collected for your state.
If you are selling goods over the Internet and your company has a presence in the state of delivery, your company has established nexus and will be required to register to collect sales tax on all taxable items regardless of method of order placement. Whether the order is placed over the Internet or through traditional means, if a company has nexus with the state in which the product is being shipped, sales tax should be billed and collected. For example, if a Pennsylvania company ships to Pennsylvania, there is nexus, and tax is collected. If the Pennsylvania company ships out of Pennsylvania, whether they collect sales tax or not depends on whether or not they have nexus with the state into which they are shipping.
No. The Act prohibited new taxes on Internet access fees. Most states do not tax the access fee. The Act did not did not prohibit states from imposing taxes on transactions conducted over the Internet. The use tax is not a discriminatory tax since it applies to all vendors (mail order, Internet, out-of-state, home shopping) and taxes goods purchased outside the state in the same manner as goods purchased in the state. So regardless of not being charged tax on an item purchased over the Internet, you are still held personally liable for the use tax.
If the retailer is located out-of-state and does not have a physical location or other type of physical representation in the state, the state cannot require the retailer to collect their sales tax. However, some out-of-state retailers voluntarily collect the tax as a convenience to their customers. If the retailer does not collect the sales tax, the purchaser has the obligation to pay the use tax directly to the state where the property is used as long as the item is taxable.
If you do not have nexus and therefore do not collect/remit the tax, can you be held liable if the customer does not pay the tax?
It is the purchaser’s responsibility to self accrue and remit use tax. There is no sales tax obligation for your company if you have not established nexus.
Yes, you can voluntarily register to collect and remit tax. But, you must register with the state prior to collecting the tax.
Streamlined Sales Tax is a national effort by state and local governments and the private sector to simplify and modernize sales and use tax collection and administration. This national effort produced the “Streamlined Sales and Use Tax Agreement.” The mission of the Streamlined Sales Tax Project is to develop measures to design, test, and implement a sales and use tax system that radically simplifies sales and use taxes. The purpose is to establish uniform sales and use tax standards, modernize sale and use tax laws, and make the burden of compliance the same for all sellers and all types of commerce. The SSTP agreement is focused on improving sales and use tax administration for both local businesses and remote sellers for all types of commerce. The Project is created and comprised of participating governments of most of the 50 states and the District of Columbia. To find more on the SSTP agreement, visit the Streamlined Sales Tax Project website at http://www.streamlinedsalestax.org/
Resale certificates are used by purchasers, when acquiring property for resale in its present form or as components of other property. They are also used to purchase taxable services that become a part of property for resale in some states. States that allow for resale exemptions either accept a state issued resale certificate or, in some cases, a multi-state certificate. A business which is registered for sales and use tax can use a resale certificate only when the merchandise being purchased is to be resold by the business. A business cannot use a resale certificate to purchase merchandise that they will use and consume in the conduct of business. Any merchandise obtained upon resale certificate is subject to sales and use tax if it is used or consumed by the purchaser in any manner, and must be reported and the tax paid thereon direct to the appropriate jurisdiction.
Generally speaking, contractors owe sales or use tax when buying materials to be incorporated into real property. Most states do not tax real property construction and services. However, some do. When contracted by agencies or organizations that qualify for a sales or use tax exemption, contractors are not always exempt. Each state needs to be reviewed individually. Contractors are generally not resellers of materials incorporated into real property; they are considered users and consumers of materials purchased for a job. However, the type of contract can change the tax implications.
Yes. Every business with a sales tax license is required to file a return even though no sales were made during the period covered by the return. However, if you have seasonal sales or your sales tax liability has declined, you may request less frequent filing from the state.
Generally, no refund of sales tax is available if you took possession of the item form the vendor with a given state. If however, you have the vendor ship the item to you outside the state, the sales tax generally will not apply. There are a few locations, including New Orleans where refunds do apply for purchases by international visitors.
Within the laws in each state, the taxability of products and services is enumerated. There are publications that summarize the states’ tax laws available through the various vendors that provide tax research materials. States also have websites that provide access to the laws and regulations in their state. Links to the states department of revenue websites are located at http://www.taxadmin.org