The Difference Between Sales Tax and Use Tax and How This Can Effect Your Business

In today’s market it is common for even small local businesses to conduct their business all over the country. Modern technology allows orders to be received by phone, fax, mail, e-mail, and the internet from out of state customers. However, with great opportunity for profit comes great responsibility. When dealing with out of state sales, it is important to know the basic definitions of the two types of retail tax: sales tax and use tax.

Sales Tax is imposed on retailers for the privilege of selling tangible personal property at retail. The tax is measured by the gross receipts from retail sales. The obligation to pay sales tax is on the seller.

Use tax is imposed upon the storage, use or other consumption in this state of tangible personal property purchased from a retailer. The use tax rather than the sales tax applies to purchases shipped from an out-of-state point to an in-state consumer. The obligation to pay use tax is on the purchaser. However, many customers fail to report and that has resulted in recent changes to state laws.

The states that have changed their laws to place a duty upon out of state vendors to register, report sales, and collect sales tax have generally followed a single pattern. While the burden initially remains with the customer, if a company has a nexus within the state it is required to register and report sales and collect and remit the tax.

“Nexus” is a means of connection, a link between an in-state business and another state. What constitutes a nexus depends entirely upon the state’s law defining that term. It can be as little as making one sale in the state, or as much as maintaining an office there. The only way to find out if a business has a nexus with another state is to analyze the language of the state’s nexus definition. Because each state has a different nexus definition, this analysis must be done for each state individually.

It is important to note that the laws of most states require companies to respond to requests for information to determine whether they meet that state’s nexus requirements. Failure to respond to these requests could result in a company being sued by the taxing authority or having civil penalties imposed upon them.

As more and more states respond to their budget crises by attempting to increase sales tax revenues, it is important for every business owner to keep in mind that, even though they may not consider themselves to be doing business in a state, they might in fact meet the state's requirements for withholding sales tax. If there is any question, consult your business attorney.

Brad Russell