This is a guide that intends to help you understand US Sales and Use tax rules.
Background and definitions
- Sales Tax: A tax imposed on sale of tangible personal property and enumerated services that is collected and remitted by a seller on intrastate sales – IE: sales where the ship-to and ship-from are in the same state.
- Use Tax: Typically complements the sales tax, but applies to interstate sales – IE: sales where the ship-to and ship-from are in different states. Use Tax can be imposed on a seller or on a purchaser. If it is imposed on the seller, it is referred to as a Seller’s Use Tax and collected and remitted by the seller. If it is imposed on the purchaser, it is referred to as Consumer’s Use Tax and a self-assessed tax that is remitted by the purchaser.See US Sales Tax - Sourcing for a more detailed discussion on intra- and interstate transactions.
There are other taxes that are passed on to the customer directly and look very much like a sales tax.
- Gross Receipts or Transaction Privilege Tax. The measure of this tax is based on the gross proceeds of a sale. The obligation for remittance lies with the seller.
For all of the taxes above, sellers are generally obligated to collect a sales or use tax on their sales to final consumers. Purchasers can self-assess a use tax when no, or insufficient, tax is collected by a seller.
There is one last type of tax:
- Excise Tax. A privilege tax that is imposed on a business for its activity in a state and is typically based on gross income. Although not a sales tax, an excise tax generally administered similar to a sales tax and the seller is not obligated to pass the tax on to the final consumer, although sellers often do pass it on.
What states impose Sales and Use Tax?
45 states impose Sales and Use Tax at the State level.
5 states do not and they are called the NOMAD states; New Hampshire, Oregon, Montana, Alaska, and Delaware. One of these states, Alaska, allows local taxes, however, as do approximately 30 other states. These local level taxes may be imposed at the county, city, district, or transit level and may be administered either by the state or by the locality. Where a locality administers their tax, the jurisdiction is known as a “home rule” jurisdiction. These home rules exist in AL, AZ, CO, and LA.
What items are subject to Sales and Use Tax?
- Tangible Personal Property (TPP): TPP is generally defined as any movable object that has substance and value. In other words, the term refers to items that may be seen, weighed, measured, felt, or touched or that are in any other manner perceptible to the senses. TPP is generally taxable unless specifically exempt under State law.
- Services: a service is any action performed by one party for the benefit of another party. Services are usually exempt unless specifically enumerated as taxable under State law. The exceptions to this rule are HI, NM, WV, where services are taxable unless enumerated as exempt.
What makes a seller obligated to collect Sales and Use Tax?
Nexus, which is a physical presence in a jurisdiction triggers an obligation for a seller to collect tax. Without nexus, a seller cannot be compelled to collect and remit tax. The rules on what constitutes nexus vary by state and can include any of the following, depending on what state you are operating in:
- Physical location in jurisdiction such as a store
- Property in a jurisdiction
- Sales presence in the jurisdiction
- Trade Shows
- Providing services in a jurisdiction
- Deliveries in company owned vehicles
- Affiliate or 3rd Party nexus – this is a game-changer that would require taxation without a significant physical presence in a jurisdiction.
Other things to research and keep straight when thinking of nexus are for states that have local level taxes is whether those states have dependent or independent nexus, meaning if you have nexus at the state level, then do you have nexus at all local levels or only the local levels where the nexus requirement is met independently.
- Voluntary nexus. A state will not prohibit a company from registering and collecting tax, regardless if the nexus threshold is met. In some cases a customer might request the seller to collect tax to minimize use tax requirements. In other cases a company might be closed, but may have had nexus while it was open during the reporting period. Lastly, the seller may register as a voluntary seller under the Streamlined Sales Tax system (SST), which we will discuss later. When you voluntarily register to collect and remit tax, just be mindful that you then have to collect tax on all sales into that state.
What amount is subject to tax?
When calculating Sales and Use tax, you have to know the tax base (the amount subject to tax), including whether deductions, if any, are taken before or after tax is calculated. Some of these deductions include:
- Retailer coupons
- Manufacturer’s Coupons
- Shipping charges
Additionally, you need to know where the tax applies (tax point), so you are always calculating the correct rate, especially in states with local tax.
- Sales Tax: The tax point occurs upon the passage of title or possession of the tangible personal property being sold; if the item being sold is a taxable service, then the tax point will often be the time the service is performed.
- Use Tax: The tax point occurs at the time property is stored, used or consumed in the jurisdiction.
What Jurisdiction gets the tax?
State and local sourcing rules determine at which location tax is calculated. There are destination-based and origin-based sourcing rules. US Sales Tax - Sourcing provides a more detailed discussion on sourcing.
- For all interstate (between state) transactions, the Commerce Clause requires that states source transactions at the destination, which means:
- Goods: Ship To Location
- Services: Location of Service Performance (generally)
- For intrastate (within a state) transactions, states may either employ destination-based rules or origin-based rules, which means:
- Goods: Ship From Location
- Services: Location of Service Provider
Are there times products or services are exempt?
Products and services might be exempt in certain circumstances
- If there is a public policy reason for it. These items are exempt no matter who the purchaser is. Examples include Food, Clothing, Utilities, and Medical Items.
- If state law contains an exemption based upon the nature of the purchaser or the purpose of the purchase.
- Entity-based exemptions are afforded to groups including the government, charities, religious organizations and schools.
- Use-based exemptions include agriculture, manufacturing, sale for resale
Generally, entity & use based exemptions are obtained by the purchaser passing a valid exemption certificate to the seller, documenting the purchaser’s entitlement to the exemption. Each state may have their own set of qualifications and requirements, so always check.
Are there times when sales are taxable, but not fully taxable?
- Caps can result in a tax only up to a certain amount of value (taxable amount cap); in only collecting a certain amount of tax (total tax cap); or limit the total state and local tax rate that can be imposed. Examples to illustrate this include:
- Tax is only charged on the first $5,000 of the sale
- There is a 1% tax on certain items up to a total of $80 in tax
- Local tax can be charged up to a total of 2%
- Thresholds can start a tax at a certain dollar value or change a tax rate when you hit a certain dollar value. Examples to illustrate this include:
- The first $175 of a single item is not subject to tax, but if that item is more than $175, the amount over $175 is taxed at 6%.
- The rate is 3% for the first $5,000 of a transaction and 2% for the amount above $5,000.
Is a fee the same thing as a tax?
Fees are different than sales tax. They are a set % or dollar amount that are payable regardless of the purchaser’s sales tax exemption status. State law dictates if fees are/are not included in the tax base.
- Environmental Fees include Tire; Battery; E-Waste on computer equipment and other electronics; White Goods
- Location-related Fees include Public Improvement Fees (PIFs); Transportation Development District (TDDs)
What is Streamlined Sales Tax?
The Streamlined Sales Tax Project (SST) was created in response to the concern of lost revenue due to sales over the Internet by remote vendors. 44 States came together to try and develop uniform definitions and administrative rules regarding sales taxes. Highlights of the SST Project include:
- 24 Member states
- Uniform sourcing rules
- No caps/thresholds for most items
- Uniform definitions for food, computer software, clothing, health related items
- Central registration system where companies use one form to register in all SST states
- Provision for Certified Service Providers (CSPs) whose tax rules and rate calculations are certified for accuracy by the SST member states
The goal of SST is to get laws passed to allow collection of taxes on remote vendors. Main Street Fairness/Marketplace Equity Bills, and Wayfair case could change everything!
SST Member States:
|Kansas||North Dakota||West Virginia|
- associate member
Why is all of this important to a QBO user?
The tax calculation functionality that is now built into QuickBooks Online has the depth and breadth to take all of the nuances noted above (for every state) and turn them into an automated process that seamlessly and effortlessly calculates the right tax, at the right rate, for every transaction a QBO customer enters. This functionality will save QBO customers time and money because they will not be focusing on researching the tax rules and rates for their transactions, but can instead focus on making more sales. Moreover, Intuit is a CSP under SST, as well has its rates certified in several other states, which gives QBO customers even more assurance of high-quality and accurate results across all state and local jurisdictions in the US.