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Sales Tax 101 (Sales Tax Basics)

Fact: All Transactions (Including E-Commerce) May Be Subject to Sales or Use Tax

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Written by: Monika Miles, Miles Consulting Group, Inc. (formerly Labhart Miles)

As a result of specific exemptions, some transactions are free of tax (and we'll outline those scenarios below). However, we hope the title above will help to dispel that still-popular e-commerce myth that all internet transactions are tax-free. (That's simply not the case.) Sales (and use) tax rules apply regardless of business model, business size or order method - on-line transactions included. The magic is in understanding the rules and working within them! This is a primer on some of those sales and use tax basics.

While "Sales Tax 101" is intended as an easy-to-read introduction to key sales tax concepts, please realize that multi-state taxation is based upon many state statutes and regulations which can vary greatly by jurisdiction, as well as circumstances. Given the many variables, this content is intended for informational purposes only (per the disclaimer at bottom of page), and may not necessarily apply directly to your particular situation.

We strongly recommend that companies, especially those that are new to this area and/or transacting significant business across state lines, work with a specialist in multi-state taxation in order to establish potential exposure areas and a workable compliance system, prior to taking any action.

The Growing Importance of Sales Tax

Sales tax has long been a challenge for businesses given that it must be taken into consideration in both sales and purchase transactions. (When selling, a business must ensure that it is properly collecting and remitting sales tax. When purchasing, a business must also factor in sales tax, although often in the form of the complementary "use tax".)

However, business sales tax is becoming an even more complex issue, as technological advances fuel e-commerce growth and allow even small on-line vendors to develop a multi-state presence. The resulting compliance complexities, as well as related concerns about fair taxation, mean that sales tax has become not only part of our daily business conversation - but an issue that every company needs to understand.

So... What exactly is Sales Tax?

Sales tax is a tax imposed by state and local jurisdictions on retailers for the privilege of selling tangible personal property (TPP) in that jurisdiction. Forty five states, plus the District of Columbia impose a sales tax (and a complementary use tax) on retail sales of TPP and certain services. The responsibility of collection of the sales tax is generally borne by the seller, if the seller has the minimum connection necessary (or nexus) with the state to require the seller to collect and remit the tax. If the seller does not have the minimum connection necessary to require it to charge sales tax, the purchaser must self remit the use tax. The use tax is a complementary tax imposed on the ultimate consumer of the tangible personal property which is not subject to sales tax, but is stored, used, or consumed in the state of the purchaser.

Example: Susie, who resides in Texas, received a catalog from ShoesGalore and has selected several pair she'd like to order. She reviews the order form and notes in the fine print that customers in CA, FL, and IL, must add sales tax. Susie happily sends in her order form and feels like she has saved the sales tax. (Once Susie receives the shoes and begins to use them, she should however, remit the corresponding use tax to the state of Texas.) Note that if the example had read that instead of ordering shoes from a catalog, Susie ordered the shoes online, the outcome would have been the same. Really, the internet is just one large online catalog.

Why It's Important: Sales tax is a pass through tax. The thing that concerns most companies is the burden and cost of collection and remittance of the taxes. (There are, by some counts, over 8,000 taxing jurisdictions in the country.) Even though the consumer is usually ultimately responsible for tax, if the seller has nexus, the obligation to collect is on the seller. And in an audit scenario, a state can look back to the seller to collect the liability. Even with a sophisticated software program, a company is likely to have a significant compliance burden.

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Please access the following Sales Tax 101 sections to learn more about sales (and use)tax:

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