Avalara Taxrates > Blog > Sales Tax News > Who's liable for sales tax, you or your customer - Avalara

Who’s liable for sales tax, you or your customer?


 Sales tax provokes many questions, such as "Who gets to seek a refund?"

For consumers, sales tax looks similar in 45 states and the District of Columbia: state sales tax and perhaps also local and special district sales taxes are collected on taxable goods and services at the point of sale (unless it isn’t, in which case consumer use tax is due). Yet in actuality, states use one of several different sales tax systems. Understanding which system is in place is essential for businesses because it impacts  legal standing.

Some states tax the vendor (e.g. California, D.C.). Some tax the consumer (West Virginia). And some (Missouri, Oklahoma, Tennessee) tax the sales transaction itself. In all states, it is customary for retailers to collect tax and remit tax.

There are both legal and administrative differences between a sales tax imposed on the merchant and one imposed on the consumer. For example, it can impact who is held liable for unpaid tax, who is entitled to seek a refund of tax erroneously paid, and who is entitled to sue over the tax.

Unfortunately, determining who bears the ultimate burden of tax isn’t always easy. This is highlighted in an opinion issued recently by the Nebraska Supreme Court: Aline Bae Tanning, Inc. v. Department of Revenue, (No. S-15-643, May 20, 2016).

Snapshot

Several tanning salon businesses sought a refund from the Nebraska Tax Commissioner for more than $1.7 million in tax paid on admissions to their salons. The Tax Commissioner rejected the refund claims on the grounds that the salons were not the taxpayers and therefore “lacked standing to claim refunds.” The case eventually ended up before the Supreme Court, which also found that “the salons do not have standing to claim a refund.”

The case seems to have been sparked by an alleged change in sales tax policy. According to the opinion, the Attorney General’s office in November 2012 issued an opinion that Nebraska Revised States 77.2703 (1) “did not subject tanning salons to admissions taxes.” The Department of Taxation then repealed the regulation listing tanning salons among the businesses subject to tax (See 316 Neb. Admin. Code, ch. 1, § 044.06 (2013)). In 2013, the tanning salons sought a refund of the tax paid on admissions, arguing that since tanning salons admissions were no longer subject to tax per the Attorney General opinion, they were entitled to a refund.

The Commissioner denied the claims and informed the salons that a “refund of tax improperly or erroneously collected can only be issued by the State directly to the purchaser who paid the tax” [emphasis in original].

In other words, the salons were not entitled to a refund because they were not the taxpayers — the consumers were the taxpayers. The Supreme Court concurred.

As explained in the Supreme Court opinion:

Section 77-2708(2)(b) permits ‘the person who made the overpayment’ to claim a refund of erroneously or illegally collected sales or use tax. Thus, only the person who made the overpayment has a real interest in the controversy of a sales tax refund claim….”

The tanning salons argued, in part, that they were entitled to the refund because they could be penalized for not collecting or remitting tax. The opinion addressed this as follows:

“Clearly, while the retailer is legally responsible for passing the revenue on to the Department, the ultimate burden of the tax falls upon the consumer who is legally liable to the retailer. Thus, the fact that retailers may be subject to penalties for failing to perform collection duties has no bearing upon our analysis; even when such penalties are imposed, the consumer is still liable for the tax under § 77-2703(1)(a).

Taxability of tanning salon admissions doesn’t matter

The Supreme Court opinion states that the taxability of admissions to tanning salons is “not entirely clear.” However, it determined that it doesn’t need to address whether or not the admissions charges are taxable because “the salons did not have standing” to seek the refund in the first place.

This case perfectly exemplifies the complexity of sales tax and the legal and administrative differences between a sales tax imposed on the merchant and one imposed on the consumer.

Sales tax automation can’t make state sales tax laws and policies less complex, but it can make managing sales tax simpler. Learn how it works.


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.