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What Does Sales Tax Mean

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What Is A Sales Tax Nexus

What does the online sales tax ruling mean for Michigan?

A sales tax nexus is the connection a business has with a state taxing jurisdiction, which establishes an obligation to collect and remit sales taxes in that state.

Establishing nexus has been increasingly complicated with online sales and the advent of remote sellers. This is because the taxation of online sales was just mandated in 2018which well cover in the next section. So understandably, theres still a lot of confusion among new and established business owners as to whether nexus applies to their online sales and how they must approach sales tax collection.

Currently, 45 states collect statewide sales tax from state retailers. The other five statesAlaska, Delaware, Montana, New Hampshire, and Oregondo not collect sales tax on a statewide basis, but some of their municipalities do.

Why Its Important That Small Business Owners Understand Sales Tax Nexus

As the business owner, you are responsible for meeting your sales tax obligations. This includes knowing whether a sales tax nexus applies to your business in any state that you operate in. Here are a few reasons understanding sales tax nexus is important:

  • You are responsible for collecting sales tax from your customers. If you fail to do so, your business is the one left holding the bill for state taxes.
  • You need to register for a nexus. If you fail to register for nexus in a specific state, you may be responsible for paying back taxes plus interest.
  • Youre responsible for being aware of all laws pertaining to sales tax nexus. For example, businesses are not permitted to advertise that they dont collect sales tax merely because they have not established nexus. So, you cant state that you have the lowest prices around because you dont charge sales tax.

Some states can be quite aggressive about pursuing sales tax nexus because it means more revenue for them. If you think theres a chance you may have missed a nexus registration, a tax professional can help you by performing a nexus study.

Components Of The Statewide Sales And Use Tax

There are seven components to the sales and use tax rate six are state and one is local. Just over half of the sales and use tax goes to the states General Fund. A portion of a percent is sent to the state for local safety, statewide education, and local revenue support for health and social services.

The local component receives just over 1 percent for county transportation and city or county operations.

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Sales Tax Vs Vat Overview

Sales tax is collected by the retailer when the final sale in the supply chain is reached. In other words, end consumers pay sales tax when they purchase goods or services. When buying supplies or materials that will be resold, businesses can issue resale certificates to sellers and are not liable for sales tax. Until the sale is made to the final consumer, sales tax is not collected, and tax jurisdictions do not receive tax revenue.

VAT, on the other hand, is collected by all sellers in each stage of the supply chain. Suppliers, manufacturers, distributors, and retailers all collect VAT on taxable sales. Similarly, suppliers, manufacturers, distributors, retailers, and end consumers all pay VAT on their purchases. Businesses must track and document the VAT they pay on purchases to receive a credit for the VAT paid on their tax return. Under a VAT regime, tax jurisdictions receive tax revenue throughout the entire supply chain, not just at the point of sale to the final consumer.

What Is Sales Tax

What the SCOTUS Sales Tax Ruling Really Means

Sales tax is one of the best ways for state and local governments to acquire funds. After all, consumer spending makes up $14 trillion of the countrys $21 trillion gross domestic product.

A sales tax is a tax thats placed on the sale of an item or purchasing of a service. The good or service must be taxablethere are lots of products in each state that are tax-exempt. California, for example, prohibits sales tax on grocery food, prescription drugs, medical services, transportation services, and software, among other things. Other states have very similar lists of products that are tax-exempt.

But for most products on sale, theres a sales tax levied on it by both state and city governments. First comes the states sales tax. Then, a city government can impose a sales tax on top of that, although its usually limited to a smaller amount. So, if the state places a 4% sales tax on an item, and the city places a 2% sales tax on the same item, youd be paying a total of 6% in sales tax on the product.

In the United States, 45 states impose sales taxes, as well as the District of Columbia and the territories of Puerto Rico and Guam. The 5 states that do not impose a statewide sales tax are:

  • Alaska
  • New Hampshire
  • Oregon

Note that Alaska and Montana do allow local sales tax. View this sales tax map to learn the sales tax rate in your state.

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Sales And Use Tax Review

Currently, the base tax rate for the state sales tax is 7.5 percent. Local jurisdictions may add onto that. This tax is imposed on all California retailers and applies to all retail sales of merchandise within the state. All retailers must have a sellers permit and pay sales tax to the California California Department of Tax and Fee Administration.

Retailers are allowed to collect the sales tax from customers but are not required to do so. Most retailers do. In all cases, they are liable for sales tax on anything they sell, whether the tax is collected from customers or not.

Use tax is levied on consumers of merchandise used, consumed or stored in the State of California. It does not matter where it was purchased. If you buy something from an online source that is not registered to collect California sales tax or else does not collect it, you are on the hook for paying the tax, which is the same rate as the sales tax.

Use tax is also imposed on leased merchandise such as cars, boats and planes. If you make a purchase in a foreign country and hand-carry it through U.S. customs into California, you must pay the use tax.

Sales and use taxes are mutually exclusive. You cannot be required to pay both sales tax and use tax for the same merchandise.

When Do I Have To Pay Use Tax

You may be obligated to pay use tax when:

  • You buy an item or service from a seller located outside your tax jurisdiction
  • You purchase from an online seller whos not established as a business
  • You use items in a taxable manner

Here are some examples of situations in which youd have to pay use tax.

1. Buying Outside Your Tax Jurisdiction

When you purchase a good or service from an area outside of your tax jurisdiction, you might have to pay use tax to your state.

Scenario 1:

Lets say that you live in California and you buy a piece of furniture from a company in New Hampshire. You dont have to pay sales tax on the furniture because theres no sales tax in New Hampshire. But California does charge sales tax on furniture. That means youll have to report the item on your annual tax filing and pay use tax on it.

Scenario 2:

You live in Maryland, and youre looking to hire a contractor to remodel your kitchen. You decide to hire a company in Delaware. They travel to Maryland and remodel your kitchen, and you dont have to pay sales tax for their service because Delaware doesnt collect sales tax. However, this is a taxable service in Maryland, and so youre required to report the transaction and pay Marylands use tax on it.

Scenario 3:

2. Using Taxable Goods

If theres an item you havent paid sales tax on, you may have to pay use tax if you use the item in a taxable way.

Scenario 1:

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Examples Of Sales Tax

What is Use Tax?

Sales taxes apply as a percentage of the purchase price. Suppose you planned to purchase a $1,000 computer in Wisconsin. The state charges a 5 percent sales tax. Additionally, Wisconsin counties charge an additional 0.5-percent tax, bringing the total sales tax to 5.5 percent.

At the time you buy your computer, youll be required to pay the $1,000 for the computer, as well as $55 in sales taxes . The retailer will keep the $1,000 for itself, and then set aside the $55 sales tax to send $50 to the state government and $5 to the county government.

Also Check: How To Calculate Federal Tax

What Is A Nexus

Nexus is one of those annoying Latin words that our society insists on using despite the fact that Latin has been a dead language for well over 500 years. Basically, it just means âconnection.â So, when we say âSales Tax Nexus,â all that means is âsales tax connection.â

Businesses that exist in or operate economically within a given state may have a âsales tax nexus â with that state. If that connection exists, the business must collect sales tax and will owe tax money to that state every year.

What Are Sales Taxes

Sales taxes are imposed by the states for transactions that occur within their borders. In most states, sales tax kicks in when there is a triggering event. Most often this event is the consummation of a retail sale. Initially, the states were content to limit their taxes to retail sales of tangible personal property. However, in recent years, most states have expanded the scope of their sales taxes to encompass leasing transactions and at least some services.

Generally, each retail sale is presumed to be taxable. However, most states allow some exemptions from sales tax, usually based on the type of item sold or upon some characteristic of the purchaser. As the business owner, you are responsible for knowing what items are taxed at which rates. However, in most cases, the purchaser must affirmatively establish his or her right to claim the exemption. For example, the purchaser may provide evidence that he is making the purchase for a tax-exempt organization.

In general, sales taxes are computed on some measure of gross receipts. In other words, the tax generally applies to the full amount a seller receives from a purchaser as opposed to the net profit the seller realizes on the sale.

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When Do I Begin Charging The New Rate

When the sales and use tax rate changes in your city or county, your business must collect, report, and pay the new rate beginning on and after the effective date. Generally, district tax rates become effective on the first day of the next calendar quarter, at least 110 days after the adoption of the district tax.

How Can I Buy A Home Subject To A Tax Sale

What a 1% sales tax increase would mean for Milwaukee County

Tax sales are often conducted via auction by a municipality and are publicly announced. You can often find auction announcements in local newspapers or online. You could also contact a municipality directly and inquire. Note that the tax lien is attached to the property itself, and not to the previous owner. This means that the buyer of the property will also have to satisfy the tax lien before the title can change hands.

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Nexus Criteria For Online Sales

Amazon is a good example of how the rise of online retailers has complicated nexus. Amazon now pays sales tax in 45 states, plus Washington, D.C. The only reason it doesnt pay tax in the other five states is that these states dont have a state level sales tax. However, Amazon does not have a physical presence in all of these states. Amazon must pay sales tax because of nexus. This is the result of a recent Supreme Court ruling, which well dive into below.

Here are some examples of current state economic nexus thresholds for selling tangible property remotely:

  • Alaska: $100,000 or 200 retail sales
  • New York: $500,000 and the business made more than 100 sales delivered to the state

It is important to note that these requirements can change. Check with your relevant taxing bodies at least annually to determine whether an economic nexus applies to your business. Pay special attention if you have inventory going through Amazon fulfillment centers in a given state.

What Happens If I Dont Report Use Tax

Use tax is notoriously difficult to enforce. The tax must be self-assessed by consumers, and many people arent even aware that use tax exists or they choose not to report it. Without the buyer or seller reporting their use tax obligation, theres little way for the state to know that use tax hasnt been paid on an applicable transaction.

Does that mean you should avoid reporting use tax? Absolutely not, and doubly so if youre a small business owner. An audit could reveal the instances in which you didnt pay use tax, and this could result in legal trouble and severe tax penalties. Remember, you could be randomly selected for IRS audit, so its important to protect yourself and your business by always being transparent about your use tax obligation.

If your business sells to multiple states, you could be subject to financial penalties from each state you do business in. That could result in huge penalty fees and interest rates that could be catastrophic for a small business.

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Sales And Use Tax Faqs

On January 1, 2008, changes to Arkansas state and local sales tax laws were for purposes of compliance with the Streamlined Sales Tax Agreement. Including Arkansas, the sales tax laws of nineteen states have been amended to be in conformity with the agreement which provides for uniformity among the states in tax administration processes, definitions of sales tax terms and equal application of tax laws to both in-state and out-of-state sellers registered to collect the sales tax.

The changes effective January 1, 2008 do not change the taxation for repair services performed at the customers location or for repair service occurring at the dealers store location where the property was brought to the store location by the customer and picked-up by the customer after the repair was completed. Taxation of repair services performed at the dealer location with the repaired property delivered or shipped by the dealer back to the customer at a location other than the store location is changed and is subject to tax at the point of receipt or delivery to the customer of the repaired property.

Local Tax Cap Changes

Rebates to Businesses of Additional Local Tax Paid on Purchases

Other

  • Purchased items outside Arkansas that would be taxable if purchased in Arkansas
  • Use, store, consume, or distribute these items in Arkansas, and
  • Have not paid Arkansas sales tax or an equivalent amount to another state .

Managing Your Sales Tax Obligations

What Are Taxable Purchases?

If you own a business, sales tax nexus is something that you should be very much aware of. Business owners often dont realize that nexus has been established in a state and that they owe sales tax. Using reliable accounting software like QuickBooks, can go a long way toward helping you maintain compliance and pay money that you owe.

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