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Sales and Use Taxes
Sales tax is a tax on the retail sale, lease or rental of tangible personal property. Use tax is a tax on the storage, use or other consumption of tangible personal property that is not otherwise subject to sales tax. Use tax is basically a companion to sales tax, and allows for the taxation of property that is brought in from out of state and used in the state that collects the tax, but is not subject to the state's sales tax.
Sales and use taxes are levied at the state, and sometimes local, level. Cities, towns and counties can levy sales tax if the state legislature grants them the power to do so. The tax rates and specific laws for sales and use tax vary from state to state and town to town. Because the specific laws regarding sales and use taxes vary so much, the following newsletter provides a brief overview of some general sales-and-use-tax principles.
What Property is Subject to Sales and Use Tax?
Sales tax is collected on sales of tangible personal property. Most states have statutes that list the types of tangible personal property (also called tangible personalty) that are subject to tax. Generally, tangible personal property includes moveable objects such as furniture, cars, clothing, office supplies, machinery, equipment, jewelry, books and similar items. Real property, such as a building, is not included. In addition, tangible personal property does not include intangible property, such as certificates of deposit, contracts, deeds and stocks. States also collect sales tax as part of the lease payments on leased tangible personal property. Many states also levy sales tax on certain types of services.
What Are the Sales and Use Tax Rates?
Sales and use tax rates vary depending on the state or local jurisdiction, and taxes can range anywhere from 4 percent to over 8 percent. Often, the state will levy sales or use tax, and a county or city will levy an additional sales or use tax, so that a person or business will be subject to both. For example, if a state has a 6 percent sales tax and a county within that state has a 2 percent sales tax, the total sales tax on a retail purchase in that county is 8 percent.
Are There any Exemptions?
Tangible personal property is subject to sales and use tax, unless it is exempt. Exemptions fall into three broad categories: specific people or businesses, certain types of transactions and certain types of property or services. Most states exempt certain categories of property from these taxes, such as clothing, food, prescription medication and medical equipment.
What is Nexus?
If there is sufficient nexus between the seller and the taxing jurisdiction, the seller must register as a vendor and collect sales tax from customers who purchase taxable goods or services. Nexus refers to whether a seller's presence in, or proximity to, the taxing jurisdiction is sufficient to require registration and compliance with the taxing authority's statutory requirements. Sellers located within the boundaries of a taxing jurisdiction, such as a state, are required to register and comply with the tax requirements because they meet the nexus test. If a seller has personnel, facilities, vehicles, inventory or activities by a related entity within a taxing jurisdiction, the jurisdiction can require registration and collection of tax.
Every state and local taxing jurisdiction has different compliance requirements. However, each taxpayer with sufficient nexus is required to register in the jurisdiction, collect and remit the sales tax, and file the appropriate returns.
Preparing for a Meeting with Your Tax Attorney
To read and print out a copy of the checklist, please follow the link below.
Preparing for a Meeting with your Tax Attorney
You can download a free copy of Adobe Acrobat Reader here.
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