Top 5 Questions about Sales & Use Tax
1. Do I have to charge sales tax on my sales to customers in my home state?
Individuals or businesses that sell tangible personal property to end consumers, and in some cases, provide services, are required to collect and remit sales tax. A seller must obtain a sales tax license prior to completing any taxable transactions. All sales are considered taxable unless the specific goods and services are defined as exempt from tax in the jurisdiction of the sale.
To determine whether or not a sale is taxable, research of the state tax code may be necessary. Some goods and services are very clear-cut as being taxable or not, while others require careful examination of the facts and circumstances. For example, in Michigan, retail sales of food normally considered as grocery items for home consumption are tax exempt. If the food is sold heated or with eating utensils provided by the seller, it is now considered “prepared food” and the sale is taxable.
2. Do I have to charge sales tax on my sales to customers in other states?
The location of a sale is generally considered to be the location of delivery of goods or services provided. Businesses conducting interstate commerce must carefully monitor their employees and shipments to identify transactions happening outside of their home state.
If you sell to another state, the first step is to test if you have sufficient contact, or nexus, with the state to have a withholding and filing requirement. While the specific rules vary depending on the state, nexus is often reached with activities such as:
- Providing services on-site in the state.
- Delivering items into the state in company vehicles.
- Owning an office or warehouse in the state.
- Storing inventory in the state at a third-party facility.
- Hiring an employee in the state.
- Additional information on sales tax nexus.
If you have nexus, research will be necessary to determine if your goods and/or services are taxed differently than in your home state as well as confirming the local tax rates. Most states allow cities and counties to administer their own tax rates and rules, and as of March 2014, there are 9998 different sales tax jurisdictions in the United States. Staying compliant in the US can become time-consuming and confusing. We recommend limiting activities that could create nexus in too many jurisdictions, but if it becomes necessary, there are software tools and services that can help high-volume sellers administer their sales tax collection and reporting.
3. My customer told me not to charge sales tax on their invoice. Should I remove it?
Charging and collecting sales tax is an obligation of the seller. In the case of a sales tax audit, the seller could potentially be liable for all back taxes, plus applicable penalties and interest, that they failed to charge to customers on taxable transactions. For this reason, care must be taken to approve and document any situation where no sales taxes are charged. While your customers may offer an explanation of why they are exempt, verify the facts with the tax jurisdiction of the sale.
Most states do not issue tax exempt numbers and instead require the buyer to prepare and provide a sales tax exemption form to the seller. Refer to the applicable tax jurisdiction for the appropriate policies and forms.
4. Should I be paying sales tax on my purchases?
While the seller has the obligation to charge sales tax, the buyer must also be aware of the rules for taxability of their transactions. Common reasons for a buyer to be exempt from tax include not being the end consumer of goods (i.e. wholesale, industrial processing) or using the purchase for exempt activities (i.e. non-profit or governmental entities). Refer to the tax jurisdiction of your purchase for the appropriate policies and forms to claim an exemption. In Michigan, properly completing, signing, and providing Form 3372 to a seller will direct them to remove tax from your invoices.
It may also occur that a vendor does not have nexus in your home state and is not licensed to charge tax. In Michigan, a common example is purchasing from online retailers such as Amazon.com, which do not charge tax in all states. In this case, you or your business may become liable for use tax, explained in the next section.
5. Should I be concerned with use tax?
Use taxes are a companion to sales taxes and apply in situations where no sales taxes were charged, but the use of the goods is taxable. Some common types of use-taxable transactions are:
- Purchase of goods out-of-state which are then brought back to the state for use.
- Purchase of goods by mail order or online when the seller is not required to charge tax.
- Consuming goods originally purchased exempt from tax (example: an automotive parts wholesaler takes parts from inventory for use in its own company vehicles).
Individuals and businesses must self-report and pay use tax. Tax authorities have become more sophisticated and aggressive in locating use tax liabilities. For example, if one of your out-of-state vendors is audited and no tax was charged on your invoices, they could contact your state authorities and trigger an examination of your business.
The above questions and answers provide a brief summary of key issues related to sales and use taxes. Depending on your business, products, and volume, compliance with sales and use tax regulations can be relatively straightforward or quite complex. It is recommended that you speak to a tax advisor to assist with planning and structuring your business activities to avoid any unexpected tax exposure.