Question

Discuss when a taxable sale occur for sales and use tax purposes.

Who is liable for the tax?

What common exemptions exist for sales and use tax?

How exemption certificates work? In general, what compliance procedures exist in most states?

Answer 1

Sales Tax is defined as a tax on the sale, transfer, or exchange of a taxable item or service. Sales tax generally applies on the sale to the end user or ultimate consumer. Sales tax is generally added to the sales price and is charged to the purchaser

Sales tax in its truest definition applies only to intrastate sales where the seller and the customer are located in the same state. Sales taxes are considered “trust taxes” where the seller collects the tax from the customer and remits the collected tax to the appropriate taxing jurisdiction

There are different types of sales taxes imposed by the states. Some states are Seller Privilege Tax states while others are Consumer Tax states. This determines who is primarily liable for the payment of the tax.

In Seller Privilege Tax states, the seller is primarily liable for the tax. The seller must pay the tax whether or not the tax is collected from the purchaser. The tax is generally imposed on the privilege of doing business in the state. Since the tax is not required to be passed on to the purchaser, it is not required to be separately stated on the invoice. However, most sellers do show the tax on the invoice. Under audit, the state can only collect the tax from the seller.

In Consumer Tax states, the tax is imposed on the buyer with responsibility for collection by the seller. The seller is still required to remit the tax even if it is not collected from the buyer, but it is usually easier to recover the tax from the buyer. The tax is generally imposed on the privilege of using or consuming the products or services purchased. Under audit, the state can collect the tax from either the seller or the purchaser. Most of the states are considered Consumer Tax states.

Use Tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is a complementary or compensating tax to the sales tax and does not apply if the sales tax was charged.

Use tax applies to purchases made outside the taxing jurisdiction but used within the state. Use tax also applies to items purchased exempt from tax which are subsequently used in a taxable manner.

There are two types of use taxes – Consumer Use Tax and Vendor/Retailer Use Tax. Consumer Use Tax is a tax on the purchaser and is self-assessed by the purchaser on taxable items purchased where the vendor did not collect either a sales or vendor use tax. The purchaser remits this tax directly to the taxing jurisdiction. Vendor or Retailer Use Tax applies to sales made by a vendor to a customer located outside the vendor’s state or sales in interstate commerce if the vendor is registered in the state of delivery.

Common Types of Exemptions:

Type of Good: Necessity goods including foods, medicines and clothing are often exempt from sales tax (or sometimes taxed at a lower rate). In addition, items such as services, real property, and intangibles such as digital goods may be statutorily exempt. These types of exemptions do not require any form of exemption documentation.

Type of Use for Goods Sold: If goods purchased are to be resold in the same form in which they are purchased they may qualify for a resale exemption. Alternately, if goods are processed (or incorporated into other goods) prior to resale, they too can be exempt from sales tax. Additional use exemptions are often available in certain industries including agriculture, manufacturing or industrial processing.

Type of Purchaser: Goods that are sold to the federal government cannot be taxed. Similar exemptions are also often available to state and local governments and agencies - as well as non-profit organizations or other recognized charitable, religious or educational groups.

Exemption certificates are a way for a business or organization to attest that you are a tax exempt entity, or that you are purchasing an item with the intent to use it in a way that has been deemed exempt from tax. In other words, sales tax exemption certificates are your proof that you can buy an item tax free.

There are two main types of exemption certificates:

Usage-based Exemption Certificates

• Resale certificates – used when buying something at retail that you intend to resell
• Offshore – used to purchase items that will be used on oil rigs, etc.
• Agent of a Governmental Entity – when contractors or other vendors make purchases that will be used for a government job

Resale certificates are the most common type of exemption certificate a retailer or online seller will use.

Entity Exemption Certificates

This is where entities are allowed to buy items tax free for their own use. Some entity exemption certificates are:

• Federal government
• State government
• Local government
• Tax exempt or non-profit exemption certificates

Rules about which entities can use exemption certificates for which purchases vary by state.

While not technically an exemption certificate, a third type of sales tax certificate is often lumped in with these other types of sales tax documents:

Direct Pay Certificate

Companies who make large purchases of multipurpose items (i.e. mixed orders of items they intend to resale and intend to use in their own businesses) can sometimes obtain a “direct pay certificate.” In this case, the company doesn’t have to pay sales tax to their vendor when making a purchase. Instead, they are required to calculate, file and pay the sales tax they would have paid when making the purchase.

Rules for obtaining and using an exemption certificate vary by state and by type of certificate.