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Product taxability sales tax risks facing retailers

  • Feb 18, 2015 | Rachael Brownell

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It’s not easy being a retailer when it comes to sales tax compliance. If changing nexus rules don’t increase tax responsibilities, confusing product taxability definitions and rules make compliance more complex. This blog addresses the latter.

Product taxability not only varies between states; it changes on a dime, depending on sales tax holidays, tax exemptions, changes in product offerings, and many other reasons.

Here are a few complicated areas of product taxability that can trip up even the savviest retailer:

Taxing products that aren’t taxable
First and foremost, don’t apply sales tax to products that shouldn’t be taxed. Leaving aside obvious reasons for exemption such as sales tax holidays (addressed below), there are common classes of products typically NOT taxable. These often include unprepared grocery items, manufactured products intended for resale, or products with an end-use that justifies exemption (something used as a baking ingredient rather than a snack).

Ignoring emerging technology
Streaming movie and music services such as Spotify, Netflix, and Amazon Prime aren’t tangible goods, but they are considered taxable by several states. Even cloud-based computer software (not exactly an emerging technology, but still new to sales tax legislation) is considered by some states to be “tangible” even though it can be downloaded without aid of disc or other hardware.

Forgetting sales tax holidays
States use sales tax holidays (tax-free shopping periods) to energize consumer spending and increase inventory turnover. Though commonly held around themes such as back-to-school or energy efficiency, there is no standard list and some states change holidays from year to year. Retailers are charged with tracking these holidays in each jurisdiction into which they sell.

Overlooking sourcing rules
Sourcing rules dictate which rates and rules apply to a transaction.
Sales within a state typically base tax rates on the location of the seller. On the other hand, sales made between states usually base rates and rules on the customer or end-user’s location.

As is clear from the above, product taxability rules and regulations change frequently and the many elements to master are typically beyond the scope of most back office operations. Sales tax management might seem straightforward, but a closer look at varying treatment of products by statute tells a different story. That is why many retailers choose to outsource sales tax management to providers with sales tax expertise.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Rachael Brownell
Avalara Author Rachael Brownell
Rachael is a content writer with Avalara with over 15 years experience of regulatory and legislative analysis. She also plays a mean game of Scrabble.