Introduction
Sales and use taxes represent a significant revenue source
at the state and local level, making up approximately
35 percent of total state and local tax
revenues. Currently, 45 states as well as the District of Columbia impose
sales and use tax. The only states that do not impose
sales and use tax are Alaska,
Delaware, New Hampshire, Montana and Oregon. In addition, approximately 6,500
local jurisdictions also impose sales and use tax. The combined state and
local sales tax rate averages approximately 8 percent.
What is Sales Tax?
The sales tax is a transactional tax that is imposed
on an event rather than on an item such as income or
property. Generally, sales tax is levied on
gross receipts derived from retail sales, transfers or rentals of tangible
personal
property and taxable services within a state. There are several exemptions
and exclusions from sales tax including, for example, sales for resale
or manufacturing and occasional sales. Generally, the “place of delivery” determines
where a taxable sale occurs. The place of delivery is where the purchaser takes
possession of the goods, generally without regard to the sales contract shipping
terms.
What is Use Tax?
The use tax is a tax imposed on the privilege of ownership,
possession, use, storage or consumption of tangible
personal property or taxable
services within a state. It is complementary to the sales tax and
applies only when
an item
has not been subject to sales tax. It is specifically designed to
prevent residents of a state from making purchases
outside that state to avoid
paying
sales tax.
Nexus Requirement
A state cannot impose sales or use tax unless a taxpayer
has “nexus” with such state. Nexus is generally
defined as some minimum connection or association between
the state and the corporation that it seeks to tax.
What constitutes nexus for sales and use tax purposes
is often very different from what constitutes nexus
for state income or franchise tax purposes (see “Overview
of Nexus” above”). Specifically, a state
may not impose a tax obligation on an out-of-state corporation
unless there is a minimal connection with such state
(referred to as the Due Process Clause). In addition,
an out-of-state corporation must have substantial nexus with
the state wanting to impose a tax. Finally, it is generally
accepted that a state cannot impose sales and use tax
on a corporation unless that corporation has a physical
presence in such state.
Collection and Remittance
Generally, sellers of taxable goods or services are required
to collect and remit sales or use taxes to the state or locality
in
which the
sale or other
taxable event occurred. Where the seller does not collect
sales or use taxes, the user may be responsible for
self-assessing
and remitting
use
taxes to
the state.
Streamlined Sales Tax Project
The Streamlined Sales Tax Project represents a reform
effort by the revenue departments of the states that
currently impose
sales
and
use tax to
simplify and modernize sales and use tax collection and
administration. The result
of this collaborative effort was the adoption by the
member states of an agreement
known as is the Streamlined Sales and Use Tax Agreement
(the “Agreement”),
which was approved by the member states on November 12, 2002. In keeping with its purpose to simplify the sales and use
tax regime, the Agreement generally provides for several
things, including:
- Uniformity
of definitions for key items to be included in the
tax base.
- One
tax rate at the state level and one tax rate at
the local level.
- State
level administration of both state and local sales
and use taxes meaning no more local tax returns.
- Uniform
sourcing rules (destination sourcing)
- Simplified
exemption procedures
- Uniform
audit procedures
- Centralized
electronic registration
- State
funding of the system.
The Agreement requires the member states to amend or
modify their existing sales and use tax laws to conform
to the provisions
of the Agreement. Currently, at least twenty states have
enacted all or a portion of this legislation. The current
status of the project can be found at www.streamlinedsalestax.org/.
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of the particular situation.
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