Sales Tax Fundamentals
Get up to speed on the basics of sales tax
The Top 5 Questions People Ask State and Local Tax Experts
byMarch 2, 2022
If your home has an electrical issue, it’s probably not a good idea to start rewiring things on your own – instead, you’d consult an electrician. The electricians of the sales tax world are State and Local Tax (SALT) experts. Companies who need answers about anything and everything related to the tax code often consult with them. TaxJar – a sales tax compliance platform – partners with SALTs to help companies stay compliant.
There are many questions SALTs get asked on a regular basis that you might have as well. We spoke to TaxOps’ Connie Zoerink, CPA, a State and Local Tax expert for over 20 years, to answer five of the most common questions.
Why does my company have a filing obligation in this state?
First, let’s talk about nexus – a Latin word meaning bind or tie. In practical terms, after the Supreme Court ruling South Dakota v. Wayfair, most states began enacting laws related to nexus. “Nexus just means a connection with a state that’s sufficient for that state to impose a tax on you,” said Zoerink. “The connection is that they’re creating an economic benefit for themselves or their company.”
If your business hits a certain threshold of revenue or transactions in a state – called economic nexus – you may have tax obligations there. (For a deeper dive into nexus, we’ve written this helpful guide.) Zoerink said that some of her clients don’t realize that there’s also physical nexus, which is commonly achieved when you have offices or product stored in warehouses in a state. But it’s also possible to gain physical nexus in a state by traveling there and attending a trade show, or by having an employee work there remotely. If your company has a physical tie to a state, you’re responsible to collect and remit sales tax there.
Why is this item taxable?
The taxability of products can be confusing to the uninitiated (it can also be confusing to the initiated). “In most situations, the law can be very nuanced,” Zoerink explained. “Bundling, for example. A handful of states will tax services – though most states do not tax services – however, if you bundle that non-taxable service with a taxable thing, it becomes taxable.”
It’s not just bundling that confuses companies. Let’s look at clothing as an example. Seven states exempt clothing from being taxed, while others, like New York, only charge sales tax on clothing items above a certain price point. A $109.99 pair of jeans is not taxable. That same pair of jeans at $110? Taxable. In New Jersey, clothing made with real fur is considered a luxury item that’s taxable, but synthetic fur isn’t taxable at all. “The laws are not the same from jurisdiction to jurisdiction,” noted Zoerink. “We’ve got 45 states with statewide sales tax and local jurisdictions and there can be different rules across all of them.”
TaxJar uses the power of automation to assign product codes for items, but if your company has products that could be open to interpretation in terms of their taxability, you may want to consult a sales tax professional like a SALT.
Why was I charged state tax when I accepted an exemption certificate?
First, let’s define what an exemption certificate is. Retailers can buy items they intend to resell without paying sales tax at the time of purchase by presenting a resale certificate (sometimes called a reseller’s permit) to a vendor at checkout. Retailers may also find themselves in the position of accepting resale certificates from buyers. However, just like with anything sales tax related, how to use and how to accept a resale certificate varies from state to state. (For a look at the rules in each state, this guide can help.)
Zoerink says that some companies will accept certificates from buyers and not charge sales tax. But sometimes the retailer will be charged sales tax after the fact. Why? “Exemption certificates are a specific document, which can vary based on jurisdiction and what’s accepted and how long they’re valid, since they expire,” she said. Depending on the state, an exemption certificate can sometimes be invalid after a 3-4 year period.
It’s critical to make sure businesses get a valid exemption certificate from a buyer, Zoerink says – some states will allow businesses to accept business licenses instead of exemption certificates, but some do not. Paying attention to those details will make sure you collect (or do not collect) sales tax correctly for each transaction.
When should I register my company to collect sales tax in a state?
As we mentioned earlier, your company has physical nexus when you begin conducting business in the state you’re physically based in, so it’s important to register to collect tax in that state. You may also have economic nexus if you pass certain thresholds with regards to sales or a number of transactions in other states.
“If your company has already been doing business there, there could be back-tax liability,” Zoerink says. “A lot of people want to know, ‘What do I do? How do I answer this question?’ when they start doing business there.” In the event there is liability, a SALT can draw up a mitigation strategy to make sure that the liability is covered and to make sure your company is registered properly. You can also read more information about when to register on TaxJar’s blog.
What’s use tax and why do I have to pay it?
Let’s first define use tax. It’s a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is complementary to sales tax, meaning the two are mutually exclusive. Use tax is generally (but not always) collected at the same rate as sales tax. You can dive deeper into the differences between sales and use tax here.
Zoerink lays out an example. “If a company is buying raw materials, but they’re reselling them down the road, that would be subject to use tax because those things are being incorporated into another thing that’s being sold,” she said. “They’re not the final user or consumer of those items.” Laptops used for business purposes or physical desks for an office are items commonly subject to use tax, she noted.