Sales and use tax is not logical and it can’t be ignored. It’s tough to understand, hard to follow, and frustrating at the least.
According to a recent Fred Pryor seminar, when you charge sales tax, you aren’t taxing the property or service itself, but the retailing of it. Use taxes are complimentary or supplemental to sales tax and are designed to help the state get all the taxes due for the storage, use or consumption of goods or services in a state. They are used to help prevent tax evasion by those who make out-of-state purchases, level the playing field between in-state and out of state sellers, and to deal with transfers or sales of property or used equipment between division or subsidiaries. Use taxes are usually remitted by the buyer.
If this sounds weird, it gets worse. This post is to encourage you to check this out for your business with a tax expert and is not meant to be advice specific to your situation. You also want to immediately sign up for information from your state government. In Texas, go to http://www.window.state.tx.us/taxinfo/sales/ There’s a lot more to this than I’ve put here.
Sales and Use Tax Gotcha’s
- The most common and costly use tax pitfall is not recognizing, capturing and paying for all taxable transactions.
- No one is exempt unless they have a current exempt certificate correctly filled out that they give to you. This applies to for profit and nonprofit businesses and organizations.
- Watch out for your liability when it comes to collecting tax from customers as well as for paying the taxes yourself. Sellers may not absorb the cost of the sales tax!
- There is a no one authority on these taxes but there is a hierarchy of authority: 1st Laws, 2nd Rules, 3rd Publications. You have to check all to make sure you are compliant.
- When it comes to your bookkeeping, your books must show the price, the tax, and tax payment as separate entries. This is critical in audits.
- Tax liability is based on where the product or service is received as well as where it’s sold (where the cash register is located). This is nexus, what connects a business to the authority of a taxing jurisdiction. An organization has nexus for income, property, and payroll taxes as well as for sales and use taxes.
- Internet purchases are subject to sales and use taxes even without the passage of the Marketplace Fairness Act. For those familiar with the Permanent Internet Tax Freedom Act of 2007, you may not realize it had nothing to do with sales and use taxes. It is about other taxes.
There are some other resources besides your state government that may be able to help you through the chaos and confusion of these often overlooked taxes.
- The Streamlined Sales Tax Project (SSTP is an effort to help state governments simplify and modernize sales and use tax collection and administration with input from the private sector)
- The Multi-State Tax Commission is an organization of most state governments that works with tax payers to administer and resolve disputes over tax laws that apply to multistate and multinational companies..Check them out for Uniform Sales and Use Tax Exemption Certificates and Sales/Use Tax Vendor Registration Forms and other useful information
Check both of these out, take a class, look at how you’re managing your sales and use taxes, and talk to an expert.