The following represents some of the basic foundation of sales and use tax that seems simple, but quickly leads to complexity and complications.
Sales Tax is an occupational tax on sellers for the “privilege” of doing business in a state. It is imposed on the gross receipts from retail sales of tangible personal property or taxable services. Retailers are liable for sales tax whether they collect it or not.
Use Tax is a critical area of compliance and exposure for many businesses! It is imposed on the storage, use, or consumption of tangible personal property or taxable services in the state of situs. Use tax is not applicable if sales tax has already been imposed.
Examples of occasions where Use taxes may be imposed:
- Ordering merchandise from a catalog or Internet from out-of-state seller
- Importing goods for consumption
- Resale property that is consumed or used instead of sold
- Creation and use of self-constructed assets
- Transfers or sales of property between divisions or subsidiaries
- Transfer of used equipment from a location in a different state
- Renting equipment from an out-of-state supplier
- Storing equipment in a state different than the state in which it was purchased or in which it will be used
- Removing product from finished goods inventory to use instead of selling it
Compliance Issues and Opportunities?
- Defining the tax base - Tangible personal property (TPP), digital product, service, or intangible?
- TPP is taxable unless specifically exempted
- Real property is generally nontaxable with a few exceptions
- Some services are taxable (varies by state)
- Intangibles – generally, not taxable
- Taxable situs of the transaction (sourcing can be complex)
- Do exemptions apply? (i.e., resale, manufacturing, exempt org, temporary storage, packaging, etc.)
- Local taxes
Transactions That Create Complexity
- Digital goods
- Cloud Computing
- Internet transactions
- Inter-company transactions (related parties)
- Disregarded entities
- Mixed transactions (taxable and nontaxable components)
- Bundled transactions (i.e., TPP and service)
- Drop shipments
If you have specific questions on any of the above topics or issues, please contact me at firstname.lastname@example.org.