THE DEFINITIVE GUIDE TO SALES AND USE TAX
THE DEFINITIVEGUIDE TO SALESAND USE TAXA Sales and Use Tax Compliance Primerp. 1/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
TABLE OF CONTENTSINTRODUCTION.3The Sales andUse Tax Landscape. 4Sales and Use TaxComplexities. 9Complying with Salesand Use Tax.14Sales Tax Practices by State.18Alabama. 18Alaska. 18Arkansas. 18Arizona. 18California. 18Colorado. 18Connecticut. 19District of Columbia. 19Florida. 19Georgia. 19Hawaii. 19Idaho. 19Illinois. 19Indiana. 20Iowa. 20Kansas. 20Kentucky. 20Louisiana. 20Maine. 20Maryland. 20Massachusetts. 20Michigan. 20Minnesota. 21Mississippi. 21Missouri. 21Nebraska. 21Nevada. 21New Mexico . 21p. 2/28 The Definitive Guide to Sales and Use Tax. Avalara 2013New Jersey. 21New York. 21North Carolina.22North Dakota.22Ohio.22Oklahoma.22Pennsylvania.22Rhode Island.22South Carolina.22South ington.23Wisconsin.23Virginia. 24West Virginia. 24Glossary.25ADDITIONAL RESOURCES. 28
INTRODUCTIONFor years, “tax-free online shopping” has brought customers to the web in droves, allwhile raising the ire of brick-and-mortar retailers claiming an unfair price advantage tosellers offering prices free of sales tax. At the center of these debates lies the small tomedium business, attempting to navigate changing sales tax requirements, and facingincreased scrutiny under these new rules.Sales tax compliance is becoming a sticky wicket, as state and local governments revisetax laws to increase revenue, and Congress considers granting states the authority tomake remote sellers charge sales tax.This Definitive Guide lays out sales and use tax basics as well as commonly misunderstood elements of sales tax compliance, to provide you a one-stop reference for allthings sales and use tax related. The last two sections include a state-by-state summary of sales tax rules and regulations, and a glossary of terms.How this guide may help youIf you collect sales tax from customers in one or more taxing jurisdictions, this guide isfor you. Covering everything from sales tax challenges to use tax statutes, this paperprovides a detailed primer on sales and use tax compliance.This guide is divided into six main sections:1. Overview of the sales and use tax landscape.Who owes it? Who collects it?2. Discussion of the complexities in sales and use tax laws.Who is exempt?3. Information about complying with sales and use tax.What steps can a company take?4. General sales tax rules by state.5. Glossary of relevant terms.6. Additional resources.What this guide will not provideAlthough we hope you’ll find it helpful, this guide is not presenting legal or tax advice.And it is definitely no substitute for expert advice. For that, please consult your taxadvisor.p. 3/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
THE SALES ANDUSE TAX LANDSCAPESales tax definedSales tax is a transactional tax that is imposed on the privilege of transacting businessin a particular state and/or local jurisdiction, based on the product or service beingsold. As a general rule, the sale of tangible personal property (TPP) is taxable unlessspecifically exempted by statute, or through the receipt of a valid exemption certificate.By contrast, services are generally exempt unless specifically identified as taxable bystatute. Exceptions are the two true gross receipt states, Hawaii and New Mexico. Inthese two states, the tax is imposed on the seller, with few exceptions.Did you know?Many states have passed lawsrequiring remote sellers (sellersbased in one state selling intoanother) to collect sales tax if theyreceive a certain number of referralsfrom in-state affiliates. Congressrecently introduced the MarketplaceFairness Act of 2013. If enacted,this law would authorize states torequire almost all remote sellersto collect sales tax as long as thestates meet certain simplificationrequirements. This will please statesthat have worked at lightning speedto implement remote seller salestax rules.45 states, including the District of Columbia, impose some form of sales and use tax.These transactional taxes are called by various names including Sales Tax, TransactionPrivilege Tax, Gross Receipts Tax, General Excise Tax, Retailers Occupation Tax, GrossRetail Tax, and/or Consumer Sales Tax. The five states that do not impose general salesand use taxes are Alaska, Delaware, Montana, New Hampshire and Oregon, althoughAlaska does not impose a state sales tax, many local jurisdictions there impose a localsales tax.A recent Census Bureau report1 indicates that sales tax comprises 31% of taxes that states collect, second only to income tax. Nationwide, sales taxes collected in 2011 totaled approximately 234 billion, an increase of 5.4% from 2010.Sales tax versus use tax. How are they different?States that impose a sales tax impose a corresponding use tax based on the storage,consumption or use of the tangible personal property or taxable service. A use taxcomes in one of two forms, either a seller’s use (collected by the seller) or consumer’suse (self-assessed and reported by the purchaser). When the seller does not collect asales tax, a consumer’s use tax is due. Generally speaking, whether a taxable transaction is subject to sales tax or use tax depends on whether the seller has nexus in theship-to state. The following are examples of transactions that result in a tax:The following are examples of transactions that result in a tax (though if the Marketplace Fairness Act of 2013 passes, remote seller requirements could change):p. 4/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
EXAMPLE 1:Transaction resulting in sales taxA Items purchased in WA.BB Seller ships from WA.AShipped to the customer in WA.Therefore, the seller charges sales tax.EXAMPLE 2:Transaction resulting in seller’s use taxAA Items purchased in WA.B Seller ships from Utah, buthas nexus in WA.Shipped to the customer in WA.Therefore, the seller has seller’suse tax obligation.BEXAMPLE 3:Transaction resulting in consumer use taxAA Items purchased in WA.B Seller ships from Utah, butdoes not have nexus in WA.Shipped to the customer in WA.Therefore, the customer hasconsumer use tax obligation.Bp. 5/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
Common misperceptions about sales tax1. “Outside the state where I’m located, I don’t have to worry about sales tax.”Definitions of nexus between states are often so incongruous and confusing,many businesses remain in the dark about their collection obligations outsideof jurisdictions in which they’re physically located. By failing to comprehend thenuances of sales tax requirements, merchants can unknowingly increase theirrisk of audit. As rules requiring out-of-state companies to collect sales tax areconsidered at both the state and federal level, the path to compliance gets evensteeper.Did you know?Companies that sell products inmany states are finding that thebest way to manage sales and usetax is to implement solutions thatautomate as much of the process aspossible, from calculation to returnsfiling. Many of these productsintegrate seamlessly within existingaccounting and ecommerce systems.2. “I only need to know and collect one tax rate in additional states where I haveoperations.”The reality is that sales and use tax is a moving target. Recent legislation andproposals at the federal level are indicative of more sales tax obligations acrossmore business and services types. This moving target could make it even harderfor companies to accurately collect and remit taxes to avoid audits and penalties.3. “This company has been doing it this way for years so there is no need tochange.”With the high number of annual sales and use tax related changes, it is nowonder businesses have a difficult time keeping up. Tracking rates, managingexemption certificates, and filing returns manually tap limited company resources in an era of slim margins and higher audit rates. Sellers risk potential taxexposure and future liability under an audit if they don’t collect tax correctly.Nexus: Why it may not be enough to determine tax liabilityNexus means a connection or tie. It is a legal term that denotes a business’s presencein a state or local jurisdiction for tax collection purposes. Nexus exists if a business connection with a state is substantial enough to allow the state to require tax collection.This connection could include a physical location (store, office or warehouse), companyproperty, sales personnel or representatives, or any other business activity that extendsbeyond the use of a common carrier or the U.S. Postal Service.The Supreme Court decision, Quill vs. North Dakota, guides the current “significantphysical presence” definition of nexus. Although states are not allowed to enact nexuslegislation in conflict with federal regulations, they are allowed to define nexus untilsuch time as federal legislation passes.Somebody has to payAs a general rule, once nexus exists, the seller inherits a legal obligation to collect taxon all taxable transactions and remit any tax due to the applicable taxing authoritiesp. 6/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
(e.g., Department of Revenue, Tax Commission, State Board of Equalization or Department of Taxation). If the seller has no nexus in a taxable state, the full responsibility ofremitting any tax becomes the responsibility of the purchaser (i.e., consumer’s use tax).States are broadening definitions of nexus in an effort to capture more tax on sales.California and Illinois, for example, have determined that online affiliates create aphysical presence, and therefore nexus. If your neighbor publishes a blog with affiliatelinks to Amazon products, he is considered an Amazon seller. This activity creates nexusin his state for Amazon. To avoid creating nexus, Amazon, Overstock and the like foughtstates and even broke affiliate relationships in order to avoid collecting sales tax.Self-assessment of taxWhen sales tax is not due, the purchaser has the obligation to self-assess the tax.Self-assessing the tax means reporting to the appropriate taxing jurisdiction any taxable purchases made during a certain reporting period and remitting the associatedtax. Many states have added a line on personal income tax returns for the purpose ofreporting tax-free purchases.If a seller has nexus in a state, they will not be released from the liability of collectingthe sales or seller’s use tax, even though the purchaser may have self-assessed the taxon the purchase. The burden of proof falls on the seller and they have the responsibility of proving that the state received the appropriate revenue. With few exceptions, thepurchaser is not released from the ultimate liability of the tax if the seller fails to collectand remit the tax due to the state. Both the seller and the purchaser can and will beassessed the tax due, if an auditor discover improperly filed or under-reported taxes.Self-administered and Home Rule jurisdictionsHome Rule states are those that allow local jurisdictions to impose their own sales anduse taxes. The following are Home Rule states: AlaskaAlabamaArizonaColoradoIdahoLouisianaTaxing jurisdictions (city, county, et. al.) within these states can self-administer taxesand impose their own taxability rules. Sales tax administration costs in these jurisdictions are so high, some businesses have chosen to take their chances with an audit,rather than comply with these rules.p. 7/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
SourcingThe term “sourcing” describes the location used to calculate tax rates, boundaries, andjurisdictions. Destination-based sourcing associates the rate charged with the deliverylocation of the product or service. Origin-based sourcing refers to the location of thebusiness that provides the taxable item. In the case of brick-and-mortar stores, thesales tax rate is based on the store location.For retailers shipping across taxing jurisdictions, whether online or via catalog, sourcing rules come into play more frequently. Such companies must be aware of tax rulesand apply these rules for both calculating and remitting the correct tax. Only a handful of states have origin-based sourcing rules, where products that are shipped to thecustomer are taxed based on the location of the business itself.The following are states that tax sales at their origin: ArizonaCaliforniaIllinoisMississippiMissouriNew MexicoPennsylvaniaTexasUtahVirginiap. 8/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
SALES AND USE TAXCOMPLEXITIESDetermining accurate taxability encompasses layer upon layer of complexity. From determining and tracking jurisdictions, rates, and transaction types to surviving an audit,it’s a burdensome, increasingly costly chore that promises to get more difficult.Determining the taxability of products and servicesEach state, and in some cases local jurisdictions (see Home Rule definition) establishtheir own unique taxability rules for purposes of generating sales and use tax revenue.Shortfalls in state revenues are motivating legislators to find ways to pass laws thatwill expand their existing taxable base.Did you know?While searching for the perfectpumpkin for Halloween in Iowa, besure the pumpkin patch knows thatyou’re going to use the pumpkinfor making pies rather than fordecoration; it will save you 7% salestax.Lacking tax expertise and without a sophisticated tax decision-making system,companies can find it difficult to properly calculate rates for all taxable transactions.Sellers need to know what’s taxable in each applicable taxing jurisdiction to preventtax exposure and future liability under audit. Moreover, they need to know what’s nottaxable, to avoid over-charging tax and potentially becoming named as a defendant ina class-action lawsuit. The more a company can automate tax collection and paymentsystematically, the more it can reduce tax exposure.Multiple taxing jurisdictions and tax ratesThere are over 11,000 taxing jurisdictions in the U.S., with localities increasing tax rateson a regular basis. Without an automated sales/use tax system in place it is almostimpossible for a company to administer sales/use tax collection and reporting responsibilities in a multi-state environment.Application of state-by-state exemptionsMany states offer special exemptions for manufacturing, industrial, farming, promotional materials, pollution control, capital improvements, warehousing, call centers,food, and various services.Most of these exemptions have limitations and restrictions that are difficult to interpret correctly. One example is the manufacturing exemption. Some of the limitationsinclude only machinery and equipment that expands a company’s capacities or operation and exclude replacement due to wear and tear. Other states limit the exemptionto the “actual process” in which an item changes from one form to another. Throughoutthe U.S., there are dozens of variations of qualifying exemptions. As a result, companieserroneously overpay thousands of dollars in sales and use tax.Bundled transactionsBundled transactions are “packaged” sales that include both taxable and non-taxableitems or services that are sold as a single unit. This type of transaction creates difficultywith system and law interpretation.p. 9/28 The Definitive Guide to Sales and Use Tax. Avalara 2013
Digital GoodsDigital goods are typically things like podcasts, music, video files, or e-books that aredelivered electronically, but states often define these goods only vaguely, if at all.Sellers of digital goods face an uphill battle when determining if and when to chargesales tax. A number of states have determined that businesses selling digital goodssuch as MP3s, e-books, and movies should charge sales tax. Other states allow thesesales to remain sales tax-free (though technically consumers still need to pay consumeruse tax).Even if you get a handle on which states tax digital goods, you still need to know whatcounts as a digital good in those states. In other words, how do states define digitalgoods? The 22 states (such as Indiana, Kentucky, and New Jersey) that have signed onto the national effort to streamline sales tax laws define digital goods as electronicallydelivered movies, e-books, and music.States not currently part of the streamline agreement often use a different approach.Connecticut includes ring tones and software under the digital goods category. Illinoiscounts newspapers, magazines, books and music downloaded electronically as digitalgoods. Other states such as California, Colorado, and Arkansas, don’t define digitalgoods whatsoever.Drop shipments—the “Bermuda Triangle”Third-party drop shipments are the Bermuda Triangle of sales and use tax. Thesetransactions involve at least three separate parties and two separate sales. It gets morecomplicated when each party is in a different state. The following diagram shows atypical third-party drop shipment transaction.COMPANY 1: Located in State A Registered in State A NEXUS in State CSALES INVOICEPAYMENTPROPERTYCOMPANY 2: Located in State B Registered in State B NO NEXUS in States Aor CPAYMENTCOMPANY 3: Located in State Cp. 10/28 The Definitive Guide to Sales and Use Tax. Avalara 2013SALES INVOICEIn this example, and in most dropshipment transactions, taxabilityrelies on documentation. That is, willState C accept a resale certificate fromCompany 2 in State B? Because Company 2 does not have nexus in State Cit is unable to provide a State C resalecertificate, relieving Company 1 of itscollection responsibility.The Institute for Professionals in Taxation (IPT) publishes a Third-Party DropShipment Survey annually. Compan
This Definitive Guide lays out sales and use tax basics as well as commonly misun-derstood elements of sales tax compliance, to provide you a one-stop reference for all things sales and use tax related. The last two sections include a state-by-state sum-mary of sales tax rules and regulations, and a glossary of terms. How this guide may help you
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Le genou de Lucy. Odile Jacob. 1999. Coppens Y. Pré-textes. L’homme préhistorique en morceaux. Eds Odile Jacob. 2011. Costentin J., Delaveau P. Café, thé, chocolat, les bons effets sur le cerveau et pour le corps. Editions Odile Jacob. 2010. 3 Crawford M., Marsh D. The driving force : food in human evolution and the future.
