Sales tax in the US is a complicated mess of rules and regulations that vary by jurisdiction. Use tax adds another wrinkle that businesses should understand. So here we delve into what sales and use taxes are and when you should start thinking about collecting and paying them.
The basic idea is that if you sell taxable products, you collect tax and remit the tax to the state. Taxable products are generally tangible products and sometimes services.
You may use tax if an item is sales taxable in your jurisdiction but you didn’t pay sales tax.
Individuals and businesses pay sales tax when they buy products, but in some cases, businesses are exempt or can get refunds on the taxes they pay.
That is the simple explanation.
The complexity comes from the fact that sales tax is regulated by the state. Ecommerce has also made the situation more challenging since selling across state lines means working with many jurisdictions.
It is impossible to cover every aspect of sales and use tax in a short blog post, but we’ll give you some guidelines and resources to get started. If you sell anything, it is worth delving into your situation’s specifics to understand when and how you are responsible for sales tax.
If you need help, contact us here, and we can look at your specific situation.
States regulate sales and use taxes in the US. This means that the states determine:
Each state has different rules, and they often allow cities and other jurisdictions to set their own rules. (And some states do not collect sales tax at all).
You must consider sales tax when you sell taxable products within a state. Most products are taxable, but there are exceptions. Some states carve out specific products such as food or clothes as non-taxable. Some states tax services, and some states (such as New York) tax software as a service.
Identifying taxable services and products is relatively easy to do if you sell through a physical brick-and-mortar location in one jurisdiction with no online sales. The sales tax system evolved in an offline world and works best in that situation.
For each location, check with the state department of taxation (the name of which will depend on the state). They will be able to specify the products and rates for your specific location. Your POS system can then automate the collection of sales tax.
We call this out specifically because we get a lot of questions about SaaS products. In New York SAAS is taxable, so if you sell such a product and have a nexus in New York you must collect and remit sales tax.
California does NOT tax SAAS. Nevada and Ohio have different rules depending on whether the product is for business or personal use. Tax Jar has a very nice post here complete with a color-coded map to help you sort this out.
If, for example, you have a business in Los Angeles and buyers in New York, are you required to collect sales tax? The answer is, it depends.
The key term here is “nexus.” Once you establish a sales tax nexus in a state, you will collect sales tax for that state.
You establish a nexus by either having a physical location in the state or meeting a sales threshold in that state.
The threshold is often tens of thousands of dollars, so if you sell one or two small items to one or two small customers in a state, you likely don’t have to worry about sales tax.
However, if you start selling significant amounts of products to a state, you should check whether you are creating a nexus.
The rules around nexus are straightforward but voluminous because they vary by state. Avalara has some great, detailed information on the nexus rules, which you can find here.
If you do have a nexus in a state, you will need a sales tax permit for that state. Tax Jar has a useful resource here that will point you in the right direction for each state.
The state will then assign you a sales tax filing frequency (generally monthly, quarterly, or annually) and sales tax due dates.
If you are an online seller, we strongly recommend using software to manage your sales tax. A couple of options include Avalara and Tax Jar. Once you implement one of these solutions, they will monitor your sales, determine where you have a nexus, and manage the filings for you.
Some states also collect “use tax.”
Use tax puts the burden of sales tax on the buyer of the goods. Depending on the state, individuals and businesses may be required to pay use tax.
Here is how use tax works: if you are subject to use tax, then if you buy goods from an out-of-state seller that does not collect sales tax in your state, you pay the tax yourself. The use tax rate can be the same as the sales tax rate, or it can be different. You will have to check your local rules.
Say you buy a $1,000 piece of equipment from another state, and your state has an 8% sales tax and 8% use tax.
If the supplier has a nexus in your state, they will charge you the 8% or $80 at the time of purchase and remit the payment to the state.
If the supplier does not have a nexus in your state, they will not charge you. That is when the use tax kicks in: you will submit a use tax return to the state, declare the purchase and pay the $80 in use tax.
Businesses pay sales tax on the products that they purchase but also qualify for some exemptions.
For example, in most cases, retail businesses do not pay sales tax on wholesale products that they buy. Some not-for-profit businesses and schools may be completely exempt from paying sales tax.
The rules depend entirely on your location and can be very complex. In one case that we know of a minor league baseball team installed a digital scoreboard. If they called it a scoreboard they would have had to pay sales tax on the installation. But by declaring it was primarily for advertisement they avoided paying the tax.
It is almost impossible to know all of the rules and for this reason, businesses often get this wrong. If you own a business and are paying a significant amount of sales and/or use tax it may be worth your while to hire a professional to review your sales tax expenditures and claim refunds. This is not something we do at Rosenberg Chesnov, but we can recommend someone if you are interested, just contact us here.
Sales and use tax require patience and sorting through many pages of rules and regulations.
Just remember these three things:
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A sales tax nexus is a presence in a state that requires you to collect and remit sales tax. You establish a nexus in a state by having economic activity in that state. Opening a location in that state establishes a nexus. Selling into a state without a location can also establish a nexus.
All states have rules regarding establishing a nexus. There is a threshold, often around $100,000 – once you pass this threshold, you have established a nexus and are then subject to the sales tax rules in that state.
This depends on the state. In New York, software as a service is taxed. In other states, it is not. Implementing sales tax software can help you manage establishing a nexus and keep you compliant with the law. Tax Jar has a very nice post here complete with a color-coded map to help you sort this out.
This excellent blog post by Tax Jar explains how to register for sales tax in every state that requires it.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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