Commonly Misunderstood Sales and Use Tax Issues
What are the most frequently misunderstood sales and use tax issues?
Intrastate vs. Interstate Transactions. (Can your staff determine who is the taxpayer is for tax purposes, how the tax is computed and what state gets the money)?
What triggers nexus. (More and more states are auditing for sales and use tax nexus (physical presence that is frequent and continuous. A state cannot compel you to register or to collect its use tax unless you have established a physical presence (called "nexus") within the state. What is sufficient to create this nexus presence? Examples include: maintaining an office, store, or other business facility in the state; employees entering the state to take orders, perform services, or otherwise do business on your behalf; real property owned or leased is located in the state; personal property you own or lease is stored or used in the state on a more than occasional basis).
Sales or Use tax concerns as a seller. (When is it the role of the seller to collect the tax from their purchasers and report and pay the tax to the state)?
Sales tor Use ax concerns as a purchaser. (When is it the role of the purchaser to collect the tax from themselves and report and pay the tax to the state)?
Identifying the main taxpayer. (The biggest difference is whether the seller or the purchaser is the main taxpayer. In some states, the tax is imposed on sellers who then have the option of passing the tax along to their purchasers. In other states, the tax is imposed on the purchaser with the seller being responsible for collecting the tax and remitting it to the state. And then, there are other states where the liability for the tax is shared by sellers and purchasers).
Taxable events. (Initially, the states were content to limit their taxes to retail sales of tangible personal property. However, in recent years, most states have expanded the scope of their sales taxes to encompass leasing transactions and services).
Computing the tax. (The tax generally applies to the full amount a seller receives from a purchaser as opposed to the net profit the seller realizes on the sale. e.g. freight, repair labor, installation labor are a part of the sales price on which tax must be charged in many states).
How use tax works. (Sales tax applies only to retail sales that are consummated within the state. This creates a big loophole from a taxing state's perspective in that purchasers can avoid the state's sales tax by making their purchases in other states. To close this loophole, each state having a sales tax also has a complementary "use" tax that applies to the storage or other use of tangible personal property or taxable services in the state).
Drop Shipments. (A company must understand if their in-state resale exemption certificate will be valid in another state when structuring drop shipment sales or if some other documentation will suffice).
Audits. (Knowing the different types of audits and which challenges can be most problematic is essential to the sales and use tax department. These days, a company needs to be aware that it is not “if we get audited” but “when we get audited” and what is the best way to handle the audit and the auditors).
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