In part one, we examined a few of the initial factors that go into determining the parties responsible for the sales tax in a transaction. As we’ll see, there are others.
Situs: It’s easy to determine when the entire transaction occurs at the point-of-sale but is more difficult when the transaction involves numerous sites. “Ownership” can also exist not during shipping but until the delivery of the tangible personal property (TTP) to the final address. The situs is the location in which a taxing event occurs, or where ownership of the TTP transfers. For services, situs is where the benefit of use occurs, generally the customer’s address or where the customer receives the benefit of service.
(Our webinar “Whose Sales Tax Is It Anyway?” offers examples of how complex situs can get, including how to formally situs inventory to where it’s stored and shipped from – eliminating worry about sales tax obligations in many, scattered locations.)
Exclusions and exemptions: For sales tax purposes, “exclusions” are absent from the statutes; no documentation is needed to prove them. “Exemptions” are exceptions to sales taxability and require a certificate as proof.
Examples of exempt transactions include a purchase for resale, purchases for industries like manufacturing or non-profits or, often, purchases for the federal government or, often, for state and local governments (frequently this applies too if a company is buying as an agent for an exempt government).
Exemptions to sales tax require valid exemption certificates. Some states allow you to make your own forms. Some states’ certificates are renewable and others’ never expire. Some states require applying for ability to issue a resale certificate. Always, though, exemption certificates’ must have the buyer’s registration/account number; buyer and seller names; the nature of the exemption (resale, manufacturing and so on); and the customer signature and the date.
Essentially, exemption certificates are legal affidavits that companies keep on file – auditors love to challenge exemptions granted to buyers. Vendors should also use common sense in screening buyers for exempt status. For example, are you selling a taxable product to a buyer who doesn’t clearly fit into an exempt category?
Drop shipments: These are typically three-party transactions – for example, between a manufacturer or distributor in one state, a retailer (who doesn’t make their own products) in another state and a buyer in a third. Drop shipments are also really two different transactions: one between the distributor and the retailer and the second between the retailer and the end-user customer.
Understanding who has the sales tax obligations in drop shipments hinges on knowing the nexus of the business/retailer making the sale to the end-user and the nexus of the drop shipper/distributor. (Examples on our webinar include how taxability in drop shipments can vary greatly depending on what states are involved.)
Marketplace facilitators: This business or organization contracts with third-party sellers to facilitate retail sales, including the collection/processing of payments, in exchange for compensation. Common examples include Amazon, eBay and Etsy. Many states – at once time thinking that revenue was being lost by not mandating sales tax obligations on marketplace facilitators – now levy sales tax according to nexus on marketplace facilitators much like they do on eCommerce vendors.
Facilitators are responsible for sales tax but vendors’ gross receipts for economic nexus purposes can include sales through 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 the complexities of sales tax, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.
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