We can’t say it enough – sales tax is complex. Whether you outsource aspects of the process or manage it all in house, there are a lot of moving parts and nothing seems to stay the same for long.
We’ve compiled some of the top questions we get from clients on sales & use tax. Part 1 of these questions was on sales tax and business services. Keep reading for some of our more introductory questions we get asked on a daily basis.
1. What is the difference between sales and use tax?
Most states have both a "sales" and a "use" tax. When states refer to a "sales tax", they usually mean the tax charged to the customer by an in-state retailer at the time a taxable transaction occurs. Sales taxes can either be a "privilege tax" or an "excise tax." As a privilege tax, the tax is imposed on the retailer for the privilege of doing business in the state. In these situations, if the retailer does not charge the sales tax, the retailer is usually the only party who can be held liable for failure to charge the tax. As an excise tax, the tax is imposed on the property being sold. If the retailer does not charge the tax, the states can usually pursue either the purchaser or the retailer for the unpaid tax.
"Use tax" is a complementary tax to sales tax and is due whenever a taxable transaction takes place, but the retailer failed to charge the sales tax. In most situations, we speak of use tax being due on purchases made from out-of-state vendors when they have failed to charge the tax on the sale. Use tax may be accrued and paid by the purchaser or it can be collected by the vendor. Many states consider the tax that is collected by a non-resident retailer to be "vendor use tax" rather than sales tax because the retailer does not have a regular place of business in the state. Other states consider use tax to be only the tax that is paid directly by the purchaser when the retailer does not charge the tax.
Use tax is one of the most misunderstood areas of multistate taxation and one area where state tax auditors generally make significant collections each year from unsuspecting taxpayers. In most cases, the rates of tax for sales and use tax are the same. In some states, the use tax may not include certain local taxes. In no situation, though, may the "use" tax rate exceed the "sales" tax rate.
2. Isn't it the customer's responsibility to pay use tax if I don't collect sales tax from them?
In many cases, the answer to this question is "yes". If a business does not have sales tax nexus in a particular state that would require them to collect and remit the tax, then the customer has the obligation to accrue and pay the use tax in the state where the property is used. If the property being sold is for resale to other customers, then the business should obtain and retain valid resale exemption certificates from their customers.
If, on the other hand, a business has sales tax nexus (either a physical presence or economic presence) then that state can legally require the business to collect and remit the sales or use tax due on the transaction.
3. I only have offices in my home state, so why should I be concerned about multistate sales and use tax?
This may be true, but sales tax nexus isn’t defined only by an office location. You can also create physical nexus through employees living in a state, contractors or representatives visiting a state to perform services or make sales, warehouses or inventory sitting in a 3rd party warehouse, and more.
Additionally, as of 2018, physical nexus is no longer the only way to create sales tax nexus. The Wayfair decision in 2018 created economic nexus as an additional way a business could create an obligation to collect sales & use tax. Economic nexus affects all businesses that previously didn’t have nexus outside of their home state. It states that if a business’s sales revenue and/or number of sales transactions exceeds a certain threshold over a one-year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax. 43 of the 45 states that have sales tax have since enacted economic nexus rules which vary state to state. Check out the latest information in our economic nexus guide.
4. Can my nexus footprint change?
Identifying your nexus footprint should not be a one and done project. Many businesses need to look at this on a yearly, quarterly or even monthly basis. You can establish nexus in a new state or jurisdiction through hiring new employees, attending tradeshows and having sales growth in new areas. It is important to set aside time to re-examine your nexus footprint, so you ensure you remain compliant.
5. Did economic nexus replace physical presence standards?
No – economic thresholds are additive to physical presence standards. This is an “either/or” review. You can have either a physical presence or an economic presence – either of which will create sales tax nexus.
6. Is it possible that I may still have to register and file returns if I don't have nexus in a state?
Yes. There could be a variety of reasons that would allow a state to require a company to register for, collect, and remit sales tax in a particular state. In most cases, the reasons for a state being able to exert this type of requirement may have nothing to do with nexus. For example, several states require companies who desire to obtain a contract with the state government that all related entities must register with the state and agree to collect and remit sales tax on sales made in that state.
Another way states require non-resident companies to become compliant with the state's sales tax laws is in the area of drop-shipments. A standard drop shipment involves the retailer's supplier shipping materials directly to the customer of the retailer. If this shipment takes place in a state where neither the supplier nor the retailer have nexus, the customer may be the only party the destination state could hold liable for the tax. If, however, the supplier has nexus in the destination state, the supplier will be required to charge the retailer sales tax on the sale unless the retailer can present the suppler a "resale exemption certificate" for the sale. In most cases, the retailer does not want to pay the supplier tax since the tax charged would be on the wholesale price and would increase its cost of sales.
To avoid being charged the tax, the retailer will likely be required to provide the supplier a resale certificate with a registration number issued from the state where the shipment is destined. To obtain such a number, the retailer will need to register with the state. Once registered, you will be required to collect the tax on its taxable sales to the customer. Therefore, even though the retailer does not have nexus, for it to avoid being taxed on its wholesale price of the goods delivered, it is likely that the state will require it to register and collect the tax.
Learn more on when you should register in a state with our infographic.
7. If my business eliminates its nexus in a state, can we stop filing returns?
Eventually, yes. Once nexus is established, states usually require that the registered company collect and remit the sales tax for at least 1 year. Most of these decisions have been informally developed and are not found in statute. Requiring a company to collect sales tax and file returns after nexus is terminated is recognition by the states that the market development activities created in the states when nexus existed has a residual affect that will last for some period of time. From personal experience, it can be somewhat difficult to cancel a registration with a state once a company is registered. In most cases, once nexus is established and a business is established in a particular state, there is a greater chance that business will expand in that state and not decrease.
If you have more questions or would just rather pass on the responsibility of sales tax to someone else, reach out. With TaxConnex, sales tax is all on us. Looking for more frequently asked questions? Check out our FAQ page.