Whose Sales Tax Is It, Anyway? Part 1

The seller’s? The buyer’s? Is this even a “tax”?

Don’t get tricked into automatically thinking sales tax is your responsibility: Many factors go into determining who has to charge, collect and remit sales tax.

Let’s look at a few, including basic definitions of taxes and conditions of taxation – and how complicated situations can sometimes make determining responsibility tricky.

“Sales tax” or “use tax”? Forty-five states and the District of Columbia have state-level sales tax, which generally applies to a sale at retail of tangible personal property (TPP) or, in the case of a use tax, to the purchase, use or consumption of TPP in a state. A number of services are taxable, too. Collection and remittance of sales tax is generally the responsibility of the vendor.

Versions of sales taxes also have different names nationwide, such as the “privilege tax” in Arizona, the “excise tax” in Hawaii or the “gross receipts tax” (taxes on a company’s gross receipts) in New Mexico.

A use tax is complementary to sales tax, and it exists because of the federal commerce clause that limits regulation that individual states can have on commerce that crosses state lines. Use tax can be the responsibility of the retailer but is generally construed to be the responsibility of the consumer. Use tax applicability and rates is generally the same as sales tax, though some states have different registration requirements and different returns for sales and use tax.

Nexus: This is the connection or presence that allows a tax jurisdiction to impose its taxing authority.

Physical nexus has historically been the nexus most companies had via an office, employees or housed inventory in a state. Physical nexus can also be created by attending a trade show or having even a service rep in a state (sometimes long after the presence, aka “trailing nexus”), though states do often apply a di minimis rule that an activity is not large enough to create nexus.

Economic nexus has been much more widespread since the 2018 U.S. Supreme Court decision in Wayfair, which ruled that states could mandate sales tax collection and remittance obligations on out-of-state company that did sufficient business in the state.

Wayfair opened floodgates of states setting their own (and widely differing) economic nexus rules depending on volume and dollar amount of sales, though many states still adhere to around $100,000 in annual sales (gross or retail, depending on the state). Many states have also started to eliminate threshold counts when calculating economic nexus.

Nationwide, many home-rule jurisdictions create their own sales tax requirements within a state. Colorado has some 73 of these jurisdictions, for instance, including Denver. Chicago is another home-rule jurisdiction. Louisiana parishes have their own tax departments, and in Alaska cities have formed a kind of home-rule sales tax coalition.

Economic nexus did not replace physical nexus but is just another factor to use in calculation of sales tax responsibilities. Thresholds can also vary state to state can depending on a company’s prior or current year’s activity.

(For more history of the evolution of economic nexus and how sales and use tax responsibilities changed as it evolved, listen to our webinar “Whose Sales Tax Is It Anyway?”)

Taxability: If have nexus, you have to assess taxability of your products and services in a state. Like nexus, taxability differs by state but generally applies to TPP and excludes services, though some states are starting to charge sales tax on services. This complexity crops up with technology products and services, where companies claim that they provide “professional services.” Telecom, by the way, is in our opinion one of the most taxed and regulated products/services across all states.

Next time, we’ll talk about sales tax responsibilities given situs, tax exemptions, drop shipments and marketplace facilitators.

(To learn more, listen to our webinar “Whose Sales Tax Is It Anyway?” here.)

If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.