Sales and use tax decisions need to be made by manufacturers when purchasing products and services, as well as when selling your products and services to customers. Making the right decisions on both sides of the fence is equally important to save your company money and minimize your audit assessments.
Purchasers and Accounts Payable staff often ask me for a simple definition of sales tax and use tax. And tips of when sales tax should be paid to a vendor or when use tax is owed to a state. Let’s begin with a basic explanation of sales tax, as it pertains to a manufacturer’s purchases.
1) What is sales tax?
When you purchase something and the vendor sends you an invoice, you’ll often see sales tax as a line item. This is the money that the seller collects and remits on the sales transaction on behalf of the jurisdiction.
2) When is a purchase not subject to tax?
The state may deem the item or service to not be part of the taxable base. Or the state may grant a sales tax exemption to the manufacturer for that purchase.
Sales tax should appear on the invoice IF you are making a taxable purchase AND the vendor has nexus in your state.
3) What is nexus?
A vendor has nexus if they have some type of physical presence in the state. This could be stores, warehouses, employees or even routine visits by sales representatives. Nexus obligates the vendor to collect and remit tax to the state on taxable sales.
4) When is use tax due?
Several circumstances exist when the vendor does not charge sales tax, but you will owe use tax to the state.
If you’re purchasing something that is taxable but you’re purchasing it from an out-of-state vendor who doesn’t have nexus – a vendor that doesn’t have the responsibility to collect sales tax -- then it is your obligation to remit the tax to the state in the form of use tax.
Another example of when a manufacturer may owe use tax is if the manufacturer gives the vendor a blanket exemption certificate, basically telling the vendor, “we take full responsibility for deciding which purchases are taxable and remitting use tax to the state.”
Other examples of when a manufacturer will owe use tax for purchases include:
- If items are purchased for an exempt purpose but later used for taxable use
- If the taxability of the items is unknown at the time of purchase
- When manufactured items are pulled out of inventory and used by the manufacturer
5) When do you pay use tax?
Regardless of why use tax is owed to a state, the manufacturer pays the use tax on the company’s sales and use tax return, usually monthly. And remember, both sales and use tax are generally subject to the same state tax laws, as well as the same sales tax exemptions.
Hopefully this basic explanation provides a better understanding of both sales tax and use tax, as it pertains to a manufacturer’s purchases. To learn more sales and use tax basics, download our on-demand webinar: Sales Tax Boot Camp: Sales Tax 101 for the non-Sales Tax Professional.
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Direct Pay Permits for Manufacturers - Good Idea?
- Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation