As consumers, most people are familiar with sales tax. When an individual consumer goes to a supplier, purchases items, and pays what is charged, the amount frequently includes sales tax on some items and not on others. It is the supplier’s responsibility to charge tax on sales that are taxable and not charge tax on sales that are exempt.
While many of the principles of sales tax that apply to an individual consumer also apply to corporate consumers, the corporation’s management of sales tax must consider a number of other factors.
Among the most important of which is that, unlike the individual, corporations are regularly audited by state taxing authorities to verify their proper payment of sales and use tax on their purchases.
What is a sales tax?
The sales tax is usually the largest source of revenue in the states where it is imposed. It is a tax imposed on the sale of taxable items and is calculated as a percentage of the sales price.
Who imposes the sales tax?
A sales tax may be imposed by states or other local jurisdictions. Currently, the only states that do not impose a sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. All the remaining states impose some form of sales tax. Because the sales tax is imposed at the state level. States frequently apply the tax to support industries or commercial activities that are a significant part of the state economy. In states where mining or manufacturing is a major part of the economy, the tax may be structured to provide more favorable sales tax treatment to items purchased and used in those industries.
How is the tax rate determined?
The tax is owed to the state where the goods are delivered and used — commonly referred to as the “destination” state. For example, if the customer visits a supplier’s location and makes a purchase (a point-of-sale purchase), the tax is collected at the sales tax rate in the state where the supplier and purchaser are located. If the purchaser orders goods (i.e., a phone or internet order) and the purchase is in State A and the supplier is in State B, and the goods are being delivered to the purchaser in State A, then the transaction is subject to the sales tax in State A. The general rule for determining the correct rate to apply to a transaction is to apply the rate applicable in the destination state.
Supplier’s Sales Tax Collection Responsibility
Suppliers are only required to collect tax in states where they have nexus. Nexus is a legal term. Nexus describes the contact or presence a supplier may have with a state that allows the state to require the supplier collect the state’s sales tax. If the supplier has no nexus in the destination state, the state has no basis on which to exert its jurisdiction over the supplier and require it to collect sales tax.
Generally, an out-of-state supplier is deemed to have nexus in a state for sales tax purposes if it has regular systematic contacts with the state, generally through employees, agents (e.g. sales representatives) or property located in the state. For example, a supplier will charge sales tax in states where it has operations, plants, stores, employees, or sales agents regularly contacting potential or existing customers. This means that when a person makes a purchase in a store, sales tax is charged. However, when a purchase is made from a supplier that has no presence in the state where the goods will be delivered, the supplier has no obligation to register to collect the tax in the destination state and no tax will be charged.