Maximum sales tax thresholds and what they mean for you

In most parts of most states, sales and use tax applies to the full sales price of a taxable transaction. But, that’s not the case everywhere. Local taxing jurisdictions in a handful of states limit the amount of local tax owed on a single item.

Seasoned sellers based in these jurisdictions are doubtless aware of these rules, but remote sellers new to collecting tax in those jurisdictions may not be. As a result, they’re at risk of over-collecting sales or use tax.

There’s a local sales tax cap on certain single transactions in Alabama. The cap used to apply to single transactions across the board. However, as of January 1, 2008, the local tax cap on single transactions applies only to sales of the following:

• Aircraft
• Manufactured housing
• Motor vehicles licensed for highway use
• Watercraft

Arkansas eliminated the broader local sales tax cap in order to be compliant with the Streamlined Sales and Use Tax Agreement.

Streamlined Sales Tax (SST) member states like Arkansas strive to make sales and use tax administration simpler and less expensive for businesses, especially remote businesses — and the broader local sales tax cap certainly complicates compliance.

A rebate for business expenses

Whereas a sales tax cap limits the amount of tax a seller can collect on a transaction, a rebate reduces the amount of sales tax a buyer ultimately pays, but only if the buyer requests a rebate. In this scenario, a seller collects all the tax and eligible buyers then apply for a refund.

Qualifying businesses in Arkansas are eligible for a rebate or refund of any local sales tax paid to suppliers for a qualifying business purchase exceeding $2,500. A qualifying business purchase is a purchase of tangible personal property or a taxable service for which a business can claim a business expense deduction or depreciation deduction for federal income tax purposes.

Businesses that hold active Arkansas sales and use tax permits and file excise tax returns with the Arkansas Department of Finance and Administration (DTFA) can deduct the amount of additional city and county tax paid. Businesses that don’t hold an active sales and use tax permit should use the Claim for Local Tax Rebate Form (Number ET-179A).

Businesses have up to one year to request a rebate. The clock starts on the sooner of the date of purchase or the date of payment of tax to the seller. Additional information is available from the DTFA’s Sales and Use Tax FAQs.

North Dakota allows localities to cap the amount of local tax due. Like Arkansas, North Dakota is an SST member state that doesn’t restrict businesses to collecting the maximum tax. On the other hand, North Dakota handles the maximum tax differently than Arkansas. 

Maximum tax amount (refund cap)

The maximum tax in North Dakota is the maximum amount of local tax that can apply to a single transaction. Not all cities and counties have a maximum local tax. In those that do, it ranges from $12.50 to $100 per sale.

Retailers can choose to collect the total local tax or only the maximum local tax, so long as they’re consistent and apply the same method to all sales. If retailers collect the total local tax, they can choose to refund the excess tax themselves.

If the seller collects the total local tax and doesn’t refund the consumer, the purchaser can obtain a refund of the excess local tax paid by applying to the North Dakota Tax Commissioner for a maximum tax amount (refund cap). According to the Claim for Refund Local Sales Tax Paid Beyond Maximum Tax instructions, any person who paid the retailer more than the maximum local tax on a purchase of tangible personal property is eligible for the refund. Additional information is available from the North Dakota Office of State Tax Commissioner.

There’s a local single article tax limitation in Tennessee: Local sales or use tax applies only to the first $1,600 of the sales price of any single article of tangible personal property in most jurisdictions, though the single local sales and use tax limit can be as low as $300 in some parts of the state. A single article of tangible personal property is defined as one item, excluding accessories, that can be sold as an independent unit.

Tennessee also has an additional state single article tax rate of 2.75 percent for the lease, rental, or sale of a single article of tangible personal property priced from $1,600.01 to (and including) $3,200.

Confused? You’re not alone, so the Tennessee Department of Revenue provides the following example to illustrate the local single article tax and state single article tax.

For a single item priced at $20,000:

• The general state sales tax (7 percent) applies to the full $20,000
• The local option sales tax (rates vary) applies to the first $1,600 only
• The additional state single article sales tax (2.75 percent) applies to second $1,600 ($1,600.01–$3,200)

The department also specifies how the single article tax limitation applies to sales of boats, computer software maintenance contracts, custom computer software, prewritten computer software, and warranty contracts.

Boats. Motors and dealer-installed accessories installed prior to the sale are considered part of the boat (the single article) and thus are subject to the single article local tax limitation. The same is true for freight and labor charges. However, boat trailers and items such as personal flotation devices are not considered part of the single item.

Computer software maintenance contracts. The local single article tax limitation and the additional state single article tax don’t apply to computer software maintenance contracts.

Custom computer software. Single article tax laws don’t apply to custom computer software or to charges for the customization of prewritten software.

Prewritten computer software. Single article tax laws apply to sales of prewritten computer software. Therefore, local tax applies to the first $1,600 only, and the additional 2.75 percent state single article tax applies to the second $1,600. The 7 percent state tax applies to the full price.

Warranty contracts. Single article tax laws don’t apply to warranty sales. Extended warranty charges purchased along with a single item must be separately stated.

While Arkansas, North Dakota, and Tennessee aren’t the only states that have maximum tax caps, the cap in many states applies to certain products only.

For example:

Florida

Localities in Florida can limit the amount of local tax (the discretionary sales surtax) that applies to a single sale of tangible personal property. In those that do, local tax applies only to the first $5,000 of the lease, rental, sale, or use of a single item of tangible personal property. The cap doesn’t apply to the rental of real property, transient rentals, or services.

Fun fact: The maximum tax on the sale of a boat or vessel in Florida (including the discretionary sales surtax) is $18,000; the maximum tax on the repair of a boat or vessel is $60,000.

New Jersey

New Jersey provides a 50-percent sales and use tax exemption on new and used boats and other vessels. Additionally, the sales and use tax on those purchases is capped at $20,000.

North Carolina

In North Carolina, the retail sale of an aircraft (including all attached accessories) is subject to the general state rate of 4.75 percent, with a maximum tax of $2,500. Local sales and use tax doesn’t apply to these sales at all.

South Carolina

In South Carolina, a maximum sales tax of $500 applies to certain items, including:

• Aircraft
• Boats
• Motorcycles and motor vehicles
• Recreational vehicles (e.g., tent campers, travel trailers, etc.)
• Self-propelled light construction equipment (restrictions apply)
• Trailers or semitrailers pulled by a truck tractor, and horse trailers

In addition:

• There’s a maximum tax of $300 on the sale of musical instruments and office equipment sold to religious organizations.
• Sales tax is capped at $300 on the sale of certain energy-efficient manufactured homes.
• The first 35 percent of the selling price of a new or used mobile home is exempt, after which the maximum tax of $300 applies, plus 2 percent of the remaining sales price exceeding $6,000 (unless certain energy-efficient levels are met).

Texas

The maximum amount of local sales and use tax due on a sale in the Lone Star State is 2 percent. According to the Texas Comptroller, “If a local use tax cannot be collected or accrued at its full rate without going over 2 percent, you cannot collect it.”

Virginia

There is a maximum tax of $2,000 on watercraft sold in Virginia. Furthermore, sales of aircraft and watercraft are subject to a reduced rate of tax.

Such maximum taxes are undoubtedly appreciated by consumers. For businesses, however, they add a layer of complexity. If you sell a variety of products into multiple states, you’re likely to encounter a maximum sales tax cap at some point. Automating sales tax management makes dealing with them much easier.