Familiarize yourself with the basics of these three major tax types.
Navigating the intricate landscape of taxation requires an understanding of sales tax, sellers use tax and consumer use tax – fundamental pillars in the realm of taxation. As major components of the taxation framework, these three distinct categories play pivotal roles in the economic ecosystem. Read more to learn their compliance requirements, and what is sales and use tax.
Sales tax is a type of consumption tax and transaction tax imposed on the sale of taxable goods and certain services. It is calculated as a percentage of the sales price and collected at the time of purchase.
What type of tax is sales tax? Sales tax is:
In most jurisdictions:
In some states, a similar tax called a transaction privilege tax (TPT) is imposed on the seller, but the cost is typically passed on to the consumer.
Sales tax revenue funds public services such as:
If a consumer makes a taxable purchase within their own state, the full sales tax is paid at the time of the transaction.
The definition of a taxable sale varies by taxing jurisdiction, but generally includes:
Sellers use tax is a type of sales tax imposed on out-of-state sellers who are registered or required to collect tax in a state where they do not have a physical presence.
It applies when a remote seller has established sales tax nexus in a state, typically through:
Although it functions like sales tax, sellers use tax specifically applies to interstate transactions where the seller is responsible for collecting and remitting the tax.
The rate of sellers use tax is generally the same as the applicable state and local sales tax rate.
In some states, sellers use tax is reported on a separate return from traditional sales tax.
Consumer use tax is a complementary tax to sales tax that applies when sales tax was not collected at the time of purchase.
It is imposed on the use, storage, or consumption of taxable goods or services within a state.
Consumer use tax typically applies when:
In these situations, the consumer is responsible for calculating, reporting, and remitting the tax to their state or local tax authority.
The use tax rate is generally the same as the applicable state and local sales tax rate.
Consumer use tax exists to:
Failure to pay use tax may result in interest and penalties.
Retailers are not usually required to collect sales tax on taxable purchases from consumers in states where the retailer does not have some connection to the state (known as "nexus"). Retailers create this connection if they have a physical presence, make regular deliveries with their own vehicles into the state, have sales representatives located in the state, affiliate nexus, click-through nexus or marketplace nexus and economic nexus. Following the Wayfair Act of 2018, economic nexus rules were established by most states, typically requiring businesses to meet specific revenue thresholds (e.g., $100,000) or transaction volumes (e.g., 200 transactions) within a particular taxing jurisdiction. The use tax burden falls on the consumer to calculate and remit the tax to their state government. Therefore, if the seller does not collect the tax from the purchaser and the transaction is taxable, the purchaser is responsible for remitting the use tax to the state.
Consumer use taxes are imposed by state and local governments for two reasons — to prevent someone from evading a sales tax by buying goods or taxable services from a non-taxing state and shipping them into the state that imposes the sales tax. The use tax protects retailers in the state or municipality because it removes the incentive for consumers to shop outside that locality to avoid paying the sales tax. The use tax rate is the same as the sales tax rate, which includes state and may include local sales taxes. A taxpayer who does not pay use tax may be subject to interest and penalties.
A person buys a vehicle from a dealer in a neighboring state, and the dealer does not charge sales tax on the car. The buyer must pay use tax on the vehicles purchase price when they return to their state and/or city.
ABC Manufacturing Co. purchases office furniture for their accounting department. The furniture is purchased from XYZ Wholesale Co., an out-of-state vendor, and sells via the Internet. After the order is placed and invoiced, XYZ Wholesale Co. delivers them via common carrier. XYZ Wholesale Co. does not include any sales tax on the invoice. The office furniture would have been charged sales tax if purchased from an in-state vendor.
Therefore, ABC Manufacturing Co. must self-assess and remit the consumer use tax that is due on the purchase to the state Department of Revenue.
These examples illustrate the application of use tax in various scenarios, highlighting the importance of understanding tax liability in different situations.
If you are interested in learning more about Consumer Use Tax solutions for your business or what Vertex has to offer, reach out to our team today.
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