Sales Tax 101 (Sales Tax Basics)
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We worked with leading tax professionals to develop our Sales Tax 101 section for
small-medium business users. We wanted it to be an easy-to-read (and easy-to-understand)
introduction to key sales tax concepts.
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While we can help you understand the basics, sales tax can be very complicated - so we
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Sales Tax 101 (Sales Tax Basics)
Brought to you by:
Written By: Monika Miles, Labhart Miles Consulting
Sales Tax Basics
and What You Need to Know:
Sales tax is one of the most common taxes encountered by purchasers today. While sales
tax (and its complementary use tax) have quite a history in the United States, the
concept is becoming more prevalent in conversations daily as these taxes become
incorporated into our on-line purchases, and as smaller companies expand their sales
footprints more quickly - thanks to technological advances. "Sales Tax 101" attempts to
discuss the basics of sales tax and what it means for sellers (companies and individuals)
required to collect it and purchasers (who might be allowed specific exemptions. We will
discuss the nature of nexus - what it is and why it's important; the differences between
sales of tangible personal property and services; how and when to register to collect and
remit in various states and the efforts in compliance. We will also discuss tips on what
to consider during a state sales tax audit and during business acquisitions. And finally,
we will touch on the Streamlined Sales Tax Initiative which aims to change years of
history related to collection of sales/use taxes.
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
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
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
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Important Note to Companies Considering Sales Tax
"Sales Tax 101" is intended to be a brief overview of things that small to mid-sized
companies operating in multiple states should consider with respect to their sales/use
tax collection responsibilities. The observations in "Sales Tax 101" are general and are
provided for informational purposes only (per the disclaimer at bottom of page), and are
not intended to answer all questions about a company's taxability, the taxable or exempt
nature of its products and services, or whether its activities in a state rise to the
level of sufficient connection to have a filing responsibility in that state.
The study and practice of multi-state taxation is based upon many state statutes and
regulations as well as state and federal court cases. Given that states vary in their
treatment of certain items, what seems taxable in one case might be exempt in another,
depending on the structure of a transaction. Individual taxpayer scenarios can differ
greatly given the many variables involved.
We strongly recommend therefore 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.
Don't forget to check the following Sales Tax 101 sections to learn more about sales
Commerce Clause to Quill Corp
Tax Nexus, TPP & Exemptions
Sales Tax Registration to Compliance
Sales Tax Audits & Acquisitions
Internet Tax & SST
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