News & Publications
Tired of Dealing with Sales Tax? Here’s the Scoop.
Sales Tax is a tax on the sale, transfer, or exchange of a taxable item or service. It is generally added to the sales price and charged to the purchaser or ultimate consumer.
Use tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. It is known as a complementary tax to sales tax and can be applied if a different state sales tax was charged at a lesser rate or if an incorrect rate is charged entirely. After hearing this you may wonder if you are responsible for paying use tax? To determine this, it is important to know that there are two types of use tax when working to identify who is responsible for the use tax: “Consumer’s” use and “Seller’s” use.
Consumer’s use tax is typically imposed on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Seller’s use tax applies to sales that are conducted by a vendor located outside of the state but is registered to collect tax in the state of the sale.
A bundled transaction is the retail sale of two or more products in which (1) the products are distinct and identifiable and (2) the products are sold for one non-itemized price. The reason this matters to businesses is that, if a bundled transaction includes a taxable product, then the entire transaction could become taxable. The 5-step process here will help you determine whether that is the situation for a particular bundled transaction although there are variances in each state’s individual application of these concepts.
Physical nexus occurs when a business has a direct connection with a state. This can be triggered by having a physical location or employee in the state.
Economic Nexus (Most Common)
Economic nexus laws impose tax collection and remittance duties on out-of-state sellers meeting gross sales and transaction volume thresholds. In other words, you do not need a physical presence in a state to be liable for sales and use tax.
Marketplace nexus occurs when a marketplace facilitator or provider, such as Amazon, collects tax on behalf of its sellers when the sales facilitate quality for economic nexus.
Click-through (Amazon) Nexus
Click-through nexus does not include advertising or banner ads, which pay for every click on the ad; rather, this type of nexus is based upon actual sales which are generated from such click-through. Click-through legislation usually sets a threshold amount for sales that are generated by the in-state referral agent before nexus becomes effective; the threshold is typically $10,000.
Manufacturing-Specific Exemptions and Incentives
States look to manufacturers as a means of boosting their economy by bringing business and jobs to the area. As this is a highly sought-after industry, states create incentives for these types of businesses. Therefore, the manufacturing industry benefits from state sales tax exemptions.
These exemptions look at the taxability of sales and/or purchases of machinery used directly in manufacturing. Manufacturing exemptions are very complex, as each state has a different interpretation of how equipment, machinery, or supplies are used in the manufacturing process. For instance, taxability of materials that eventually become ingredients or component parts is one example of what is considered an exempt use.
Want More of This?
Allyn's tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state, and local tax compliance and consulting for large US and global corporations. Our website is constantly updated with tax content designed to help your team function smoother. Visit us here
Our team posts regular updates on LinkedIn to keep you up to date in the indirect tax realm – follow us here!