With more than 11,000 taxing jurisdictions in North America, research and compliance for small to medium sized businesses can be almost impossible on your own, leaving the door wide open for an auditor. With state and local governments revising tax laws to increase revenue, and Congress considering giving states the power to make online retailers collect sales tax, understanding the sales tax landscape has never been more crucial.
This guide lays out sales and use tax basics, explains pending online sales tax legislation, and offers a state-by-state summary of sales tax rules and regulations. It is a one-stop reference for all things sales and use tax related.
The Sales and Use Tax Landscape
Sales tax is a transactional tax that is imposed on the privilege of transacting business in a particular state and/or local jurisdiction, based on the product or service being sold. As a general rule, the sale of tangible personal property (TPP) is taxable unless specifically exempted by statute, or through the receipt of a valid exemption certificate. By contrast, services are generally exempt unless specifically identified as taxable by statute. Exceptions are the two true gross receipt states, Hawaii and New Mexico. In these two states, the tax is imposed on the seller, with few exceptions.
45 states, including the District of Columbia, impose some form of sales and use tax. These transactional taxes are called by various names including Sales Tax, Transaction Privilege Tax, Gross Receipts Tax, General Excise Tax, Retailers Occupation Tax, Gross Retail Tax, and/or Consumer Sales Tax. The five states that do not impose general sales and use taxes are Alaska, Delaware, Montana, New Hampshire and Oregon, although Alaska does not impose a state sales tax, many local jurisdictions there impose a local sales tax.
Common Misperceptions About Sales Tax
1. “Outside the state where I’m located, I don’t have to worry about sales tax.”
Definitions of nexus between states are often so incongruous and confusing, many businesses remain in the dark about their collection obligations outside of jurisdictions in which they’re physically located. By failing to comprehend the nuances of sales tax requirements, merchants can unknowingly increase their risk of audit. As rules requiring out-of-state companies to collect sales tax are considered at both the state and federal level, the path to compliance gets even steeper.
2. “I only need to know and collect one tax rate in additional states where I have operations.”
The reality is that sales and use tax is a moving target. Recent legislation and proposals at the federal level are indicative of more sales tax obligations across more business and services types. This moving target could make it even harder for companies to accurately collect and remit taxes to avoid audits and penalties.
3. “This company has been doing it this way for years so there is no need to change.”
With the high number of annual sales and use tax related changes, it is no wonder businesses have a difficult time keeping up. Tracking rates, managing exemption certificates, and filing returns manually tap limited company resources in an era of slim margins and higher audit rates. Sellers risk potential tax exposure and future liability under an audit if they don’t collect tax correctly.