In our last blog, we reviewed income tax in terms of economic nexus and how states view apportionment factors, such as sales, industry and type of service, differently. Now we’ll take a look at sales and use tax. Similar to state income tax, a business entity must have nexus with a state before it can be required to collect a state’s sales tax. Alaska, Delaware, Montana and Oregon do not have sales tax; though Delaware does have gross receipts tax.
Unlike state income tax, there is no public law protection that applies for sales tax nexus. Once a business has created sales tax nexus with a state, the business must collect that states sales tax. The nexus threshold for sales tax is significantly lower than state income tax nexus; however, there is still a physical presence requirement before a state can require a business to collect its states sales tax. Having a sales representative travel into a state is sufficient for nexus to be created.
Generally, all exchanges of tangible personal property are subject to sales tax unless the state provides for an exemption or an exception. Services, on the other hand, are generally exempt unless state statute specifically taxes the service. In Ohio, examples of taxed services include fitness clubs, personal care services (e.g., hair, nails, massage) and lawn and snow services.
Once nexus is established, it is important to examine state statute to determine if the product being sold or the service an entity is providing is taxable in the state. Exemptions/exceptions will differ by state. Some states may exempt manufacturing equipment and other states might tax the purchase of such equipment. In addition to exempted products and services, some entities are exempt, and in those instances, a business would not be required to charge sales tax. An example of an entity that might be exempt from state sales tax is a nonprofit organization. Analysis will also have to be conducted to determine what sales tax rate is required to be charged on the various transactions.
Generally, most states provide for an exemption from sales tax if the product or service being purchased will be resold. Take note, if the purchaser is claiming a resale exemption, it is important for the seller to secure an exemption certificate from the purchaser. This documentation is required to support the exemption if a state conducts a sales tax audit of the seller.
All states that impose a sales tax also impose a use tax. Use tax, as the name indicates, is generally due on the purchase of items used in a business. Any individual who purchases an item in which sales tax was not paid must pay use tax on the item. Examples would include items purchased over the Internet and those purchased for use in one state but purchased from a vendor located in another state. Any exemptions/exceptions that a state statute provides for sales tax would also apply for determination of any use tax due.
There still needs to be a connection with the state before remittance of use tax is required. Generally, this would be established by having a location in the state, such as an office, plant and/or a warehouse.
States are attempting to expand their sales tax reach by enacting affiliated nexus and click through nexus.
The Skoda Minotti SALT team works across state lines to provide clients with the tax guidance they need in areas including income and franchise tax, indirect tax, and credits and incentives. Email Mary Jo Dolson, CPA or call her at 888-201-4484 to learn more about how these taxes affect your business.
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