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Sales and Use Tax from the B2B Perspective

Disclaimer: The information in this article is not, nor is it intended to be, legal advice. It is imperative that any action you take be done on the advice of competent legal counsel, and not based solely upon this article.

Sales Tax Nexus

Every business knows that sales tax is the tax you charge a company in your state and/or local taxing jurisdiction when it buys your product or taxable service. But did you know, you could be responsible for collecting sales tax from customers in states other than your own?

In tax law, nexus describes a situation in which a business has a presence in a state and is, therefore, subject to collecting sales tax on sales within that state.

A business might have sales tax nexus in a state if it has:

  1. A physical location in the state – including a warehouse or shipping facility.
  2. Employees working in that state, including outside sales reps.
  3. Property (including intangible property) in the state.
  4. Employees who regularly solicit business in the state (including telemarketers, even if their location is outside the nexus state).

If a business has nexus in a particular state, it is required to register with that state, and collect and remit sales tax in accordance with that state’s rules, regulations, and rates.

Even if a product or service is not taxable in the seller’s state, if that product or service is taxable in the buyer’s state, the seller with nexus is responsible for collecting and paying the sales tax to the appropriate state/local taxing authority.

Use Tax

Use Tax is a type of excise tax. It is assessed on purchases made outside the company’s state of residence for use in the state of residence. Essentially, the purpose of the use tax is to compensate for a loophole in the sales taxing power of states.

  • As a general rule, a state’s power to tax reaches only as far as its borders. This means that a state cannot impose its sales tax on sales made in other states.
  • Because of this, the state’s residents could easily avoid paying sales tax altogether by either physically crossing the border to an adjoining state to make a purchase or by making online purchases from companies located in other states.

The Use Tax closes this loophole by requiring the buyer to pay a use tax on any purchase made outside its state of residence that would be taxable in its state of residence.

  • Use Tax, then, is a complement to sales tax. The use tax rate in any state is typically the same as the sales tax rate.
  • For the most part, the use tax applies to the same categories of products and services as sales tax, and exemptions for use tax are the same as for sales tax.

Some differences between Sales and Use Taxes

  • The seller is responsible for collecting and remitting sales tax; the buyer is responsible for calculating and paying use taxes.
  • Sales tax is paid to the seller; use tax is paid to the state (or local) government.
  • Sales tax is assessed by the seller; use tax is self-assessed by the buyer.
  • Sales tax is paid to the seller at the time of sale; use tax is paid to the state government according to its requirements – usually annually, biannually or quarterly.

Under what circumstances would the buyer be responsible for paying Use Tax?

When the buyer purchases a product or service from a state other than its state of residence it may be responsible for a use tax. This is most likely if the seller does not collect sales tax on the purchase – indicating that the seller does not have nexus in the state where the sale was made.

In such cases, determining whether use tax comes into play is based on the rules of the buyer’s state concerning allowable exemptions and the intended use of the purchased products.

Exemptions to use tax are generally the same as for sales tax within each jurisdiction. Common exemptions include:

  • Purchases for resale
  • Goods used directly in the production of other goods
  • Raw materials used in manufacturing
  • Purchase by the government, churches, schools, not-for-profit hospitals

Streamlined Sales and Use Tax Agreement (SSUTA)

The SSUTA (last amended May 20, 2021) is the outcome of a collaborative intention from 44 states, the District of Columbia, local governments and the business community to clarify the sales and use tax collection and administration process for retailers and states. The SSUTA reduces costs and administrative handicaps on retailers that collect sales tax, especially retailers operating in multiple states. It also levels the playing field between local “brick and mortar” stores and remote sellers by ensuring that both operate under the same tax rules.

The SSUTA simplifies sales tax administration in a number of ways, some of which include:

  • Subsidized start-up costs: To determine if some or all of your SSUTA start-up costs can be subsidized, contact directly.
  • Centralized electronic registration: It’s possible to register with all SSUTA member states simultaneously by visiting Streamlined Sales Tax Governing Board, Inc.
  • Uniform tax definitions
  • Consistent product definitions
  • Uniform electronic tax filing
  • Tax Rate simplification
  • Audit protection: When you utilize a Certified Service Provider, that service provider is usually audited, rather than you.
  • State funding: For the administrative costs.

All of these benefits, however, apply in member states only. If a business sells in non-member states, those use tax liabilities have to be managed separately.

To date, 24 states have passed the conforming legislation, including:

  • Arkansas
  • Nebraska
  • South Dakota
  • Georgia
  • Nevada
  • Tennessee
  • Indiana
  • New Jersey
  • Utah
  • Iowa
  • North Carolina
  • Vermont
  • Kansas
  • North Dakota
  • Washington
  • Kentucky
  • Ohio
  • West Virginia
  • Michigan
  • Oklahoma
  • Wisconsin
  • Minnesota
  • Rhode Island
  • Wyoming

Sales and Use Tax and Online Sales

Sales or use taxes are currently required by many states on online (Internet) sales for both B2B and B2C businesses. Several States have a line on their income tax form where individuals are required to list online purchases on which they did not pay state sales tax; New York State’s Income Tax form is one of them. Other states may not require sales tax on Internet purchases.

However, according to a June 30, 2021 article from BDO titled “The Business Impacts of Wayfair“, online shoppers were unknowingly improving their state finances—thanks to a 2018 Supreme Court decision in South Dakota v. Wayfair:

“The South Dakota v. Wayfair Supreme Court decision held that states may require businesses to collect and remit sales tax even if the business has no in-state physical presence. Wayfair changed a remote seller’s considerations from ‘do I have physical presence’ to ‘how do I comply with all the state and local jurisdictions where my products or services are delivered?’

The decision has broad impacts on states, e-commerce sellers, digital service providers, consumers, and buyers and sellers of businesses. Companies must understand how their products and services are taxed in all the states in which they are sold and create a system that tracks this activity. Now may be the time to consider indirect tax automation software to help ensure compliance with state and local laws, and to more efficiently report and remit taxes.

Self Assessing Sales and Use Tax

As mentioned previously, if a business purchases products or services out-of-state, does not pay sales tax to the seller and their purchase is taxable in their own state, they are required to pay use taxes on those purchases.

In addition, purchasers can request their State allow them to assess all taxable purchases themselves and pay the states directly, rather than paying the seller any applicable sales tax.

To be able to self-assess sales and use tax, a company must hold a Direct Pay Permit. This is provided by the State in which the company is located. The purchaser must provide a copy of the Direct Pay Permit (or any exemption certificate) to their vendor as proof that the vendor is not liable for sales tax on the purchases of the buyer and that the buyer is permitted to self-assess all sales tax payable and submit it to the state. As an example, take a look at New York State’s Direct Pay Permit.

Why would a company choose to self-assess all of their sales and use tax liabilities?

Large companies are most likely to choose to self-assess sales and use tax liabilities. Two benefits of this decision are:

  1. Better control over use tax liability: Rather than relying on out of state vendors to determine when sales tax applies, the company makes this determination itself, preventing potential errors and overpayments.
  2. Improved cash flow management: With self-assessment, the company pays its use tax liability monthly, quarterly, biannually or even annually, rather than each time a taxable purchase is made. This frees up the sales tax funds for other uses until the tax liability is due.

Of course, there are also risks to choosing to self-assess all of your sales and use tax liability. For instance:

  • Audits. Taxing jurisdictions typically conduct regular audits on all direct pay permit holders.
  • Additional Costs. Companies that self-assess will need to implement internal procedures to identify transactions that require sales tax. They may also have to invest in special software or a third party service to manage their sales and use tax liability.

Compliance Audits

In the current climate of large state deficits, where the states are looking for every possible means of obtaining much-needed cash, sales and use tax audits are becoming more frequent and aggressive. Compliance penalties are also becoming stiffer.

Because the auditors consider every sale taxable until proven otherwise, companies should have a good record retention system that not only saves essential records, but also makes them easy to find.

Some of the documentation you should be able to access for a sales and use tax compliance audit include:

  • Sales documents: Which should be recorded when the order is taken: commercial and credit sales invoices, customer purchase orders, customer correspondence, bills of lading, freight invoices, shipping instructions, cash register receipts
  • Purchase documents: In addition to the above, purchase orders, tax accrual records showing that the tax was either paid to the seller or accrued by the company and paid to the appropriate jurisdiction.
  • Exemption and Direct Pay Permits

Sales and Use Tax Compliance

In the United States, there are more than 11,000 taxing authorities and the laws and tax rates within each are changing quickly. This makes sales and use tax compliance a complex process. However, the risk of non-compliance in the current economy, makes it essential that every company doing business across state lines takes this issue seriously. Fortunately, there are software packages that can help you manage your sales and use tax liabilities and specialist companies that can either help you set up a compliance program or take on this responsibility for you. Whatever you choose, don’t make the mistake of not dealing with the issue. The result could be extremely costly.

Sources of Information on Sales and Use Taxes

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