Sales Tax Foundations (Part 1) – Definitions

The Basics of Sales Tax Compliance

Part I: Basic Questions and Answers about State Sales and Use Tax: Sales and Use Tax Defined

For companies who do business around the country, the adage “It’s what you don’t know about sales and use taxes that can kill you” has never been more appropriate.  And frankly, without the automation software to support workflow fed with accurate and timely sales tax rates and taxability rules, and legal research support to track and interpret rules that are constantly changing, it is often hard to stay out of trouble.  And that trouble can take the form of: (1) state audits, sometimes over a 3- or 4-year period, to collect taxes from the retailer who either failed to collect or under-collected the right amount of tax from the purchaser and (2) class action suits by purchasers to require retailers to refund over-collected tax to the purchasers again over multiple-year periods.  That can add up to substantial tax liabilities, especially in large multi-national companies.  But the good news is that although the risks are real, the solutions are also real and available.

But for the nontax specialists in the decision-making body of any company, the complexities of sales and use tax rules can be mystifying.  So, for the nontax specialist, we will try to take some of the mystery out of it by answering the basic questions around sales and use taxation.  In this series, we will cover each of the following basic topics:

  • Sales and Use Tax Defined
  • Constitutional Rights
  • Taxable Persons
  • Exemptions and Exclusions
  • Taxable Transactions
  • Interstate Transactions
  • Subjects of Sales and Use Taxes
  • Amount and Rate of Tax
  • Administration

 

Sales and Use Tax Defined—In General

Question 1: What is the nature and character of the sales tax?

Although the definition may vary from state to state, in general, sales tax is imposed on every retailer for the privilege of making retail sales of tangible personal property in the state.

Question 2: What is the nature and character of the use tax?

Although again, the definition may vary from state to state, in general, use tax is imposed on the purchase of tangible personal property from any retailer for storage, use, or consumption in the state when the state sales tax was not paid.

Question 3: Are services subject to the sales and use tax?

There is no one answer; It depends on the state.  However, in general, most states only tax specifically enumerated services and so the rules of each state must be researched.

Question 4:  What is the Streamlined Sales Tax Agreement?

The agreement is a model agreement intended to create a uniform set of sales tax rules to reduce the burden of tax compliance and thereby encourage sellers without a physical presence in the state to voluntarily register and begin collecting tax in response to the simplifications. The member states (currently 23) hope that Congress eventually will grant them authority to compel sellers to collect and remit tax on remote sales. So far that hasn’t happened.  And key states like California, Texas, Illinois, Florida, and New York have not adopted the agreement.

Sale and Use Tax Defined—State-Specific

Read more if you want to review a chart that provides more specific state definitions:

 

STATE RULE
ALABAMA Alabama sales tax is a privilege tax imposed on the retail sale of tangible personal property sold in Alabama by businesses located in Alabama. ( Ala Code Sec. 40-12-222 ; Ala Code Sec. 40-23-2 ) The Alabama use tax is levied on the storage, use or consumption of tangible personal property sold into Alabama from a location outside the state, as either a sellers use tax or a consumers use tax, depending on the circumstances.
ALASKA Alaska does not impose a statewide sales and use tax. However, local taxes may be imposed.
ARIZONA The Arizona transaction privilege tax (sales tax) is a tax on the privilege of doing business in the state. ( Sec. 42-5008(A), A.R.S. ; Reg. R15-5-2002 ) The use tax is an excise tax on the storage, use, or consumption in Arizona of tangible personal property purchased from a retailer or from a utility business. ( Sec. 42-5155, A.R.S. )
ARKANSAS The Arkansas gross receipts (sales) tax is levied on gross receipts from the sale of tangible personal property, enumerated taxable services, and, beginning January 1, 2018, specified digital products and digital codes. The compensating (use) tax is imposed on the privilege of storing, using, distributing, or consuming tangible personal property, an enumerated service, or, beginning January 1, 2018, a specified digital product or digital code within Arkansas. ( Sec. 26-53-106, A.C.A.; Reg. UT-4)
CALIFORNIA California sales tax is imposed on every retailer for the privilege of making retail sales of tangible personal property in the state. ( Sec. 6051, Rev. & Tax. Code)

 

California use tax is imposed on the purchase of tangible personal property from any retailer for storage, use, or consumption in California when California sales tax was not paid. ( Sec. 6202, Rev. & Tax. Code)

COLORADO Colorado sales tax is imposed on sales and purchases of tangible personal property at retail. ( Sec. 39-26-104(1)(a), C.R.S. ) Colorado use tax applies to the privilege of storing, using, or consuming tangible personal property in Colorado that has been purchased at retail. ( Sec. 39-26-202(1), C.R.S. )
CONNECTICUT Connecticut sales tax is imposed on all retail sales in Connecticut. Connecticut use tax is imposed on the storage, acceptance, consumption, or any other use in Connecticut of tangible personal property or taxable services purchased from any retailer and on goods that are manufactured, fabricated, assembled, or processed from materials by a person inside or outside Connecticut. ( Sec. 12-408(1), G.S.; Sec. 12-411(1), G.S.; Informational Publication 2017(25); Informational Publication 2014(21))
DELAWARE The taxes grouped in this division are license or privilege taxes, which are in addition to the numerous licenses, and additional license fee on gross receipts of occupational licensees. They resemble sales and use taxes found in many states in that the taxes are measured by gross receipts. However, the taxes contain no provision for passing the tax on to consumers.
DISTRICT OF COLUMBIA District of Columbia sales tax is imposed on the retail sale of taxable tangible personal property and specified taxable services. Use tax is imposed on the use of taxable items and specified taxable services in the District when the sales tax has not been paid.
FLORIDA Florida sales tax is a privilege tax imposed on each taxable transaction made by a dealer located in Florida and delivered to the purchaser or the purchaser’s representative in Florida. Every person engaged in the business of selling tangible personal property for use, consumption, or storage for use in the state is exercising a taxable privilege. ( Sec. 212.02(2), F.S.; Sec. 212.054(3), F.S.) The Florida use tax is imposed on all persons that use, consume, distribute, or store tangible personal property in the state and applies to tangible personal property purchased outside the state that would have been subject to the sales tax if purchased from a Florida dealer. ( Sec. 212.05, F.S.; Rule 12A-1.091)
GEORGIA The Georgia sales tax is imposed on retail sales, leases and rentals, and specified services. The Georgia use tax is imposed on the storage, use, or consumption of tangible personal property in Georgia. Cities, counties, and special districts may impose local sales and use taxes. ( O.C.G.A. Sec. 48-8-30(a), (d) ; O.C.G.A. Sec. 48-8-34(b) )
HAWAII Hawaii does not have a sales tax, but imposes a general excise tax on certain transactions and activities. The general excise tax applies to sales and rentals of goods and the provision of services and is imposed at various tax rates on gross income, gross proceeds of sales, or values of products in the distribution chain. The use tax is imposed on the use of tangible personal property and services imported by a taxpayer in Hawaii. ( Haw Rev Stat Sec. 237-13 ; Haw Rev Stat Sec. 238-2 )
IDAHO Idaho sales tax is an excise tax imposed on retail sales and certain enumerated services. ( IC Sec. 63-3619; Rule 35.01.02.068.01) The Idaho use tax is an excise tax imposed on the privilege of storing, using, or consuming tangible personal property within the state. ( IC Sec. 63-3621(a); Rule 35.01.02.072.01)
ILLINOIS Illinois has four sales and use taxes for transactions involving tangible personal property: the retailers’ occupation (sales) tax, the service occupation tax (SOT), the use tax, and the service use tax (SUT). Illinois imposes sales tax on persons in the business of selling tangible personal property at retail and SOT on persons in the business of selling services in Illinois. ( 35 ILCS 115/1 ; 35 ILCS 120/2 ) Use tax is imposed on persons who use tangible personal property in Illinois, while SUT is imposed when certain property is received while purchasing services. ( 35 ILCS 105/2 ; 35 ILCS 110/2 ) Services are generally not subject to sales and use tax.

 

The statutes for each of the four taxes contain many identical rules of application. In addition, retailers’ occupation (sales) tax regulations that are compatible with the use tax and service occupation tax (SOT) apply to the imposition of use tax and SOT, and SOT regulations that are compatible with the service use tax (SUT) apply to the imposition of SUT. ( 86 Ill. Adm. Code 140.430 ; 86 Ill. Adm. Code 150.1201 ; 86 Ill. Adm. Code 150.1320 ; 86 Ill. Adm. Code 160.145 )

INDIANA Indiana gross retail (sales) tax is imposed on the retail sale of taxable tangible personal property and specified taxable services. Use tax is imposed on the use of taxable items in Indiana when the sales tax has not been paid. ( IC 6-2.5-3-2 ; IC 6-2.5-2-1; 45 IAC 2.2-2-1; 45 IAC 2.2-3-20)
IOWA The Iowa sales tax is a broadly imposed general tax levied on the sales price from retail sales of tangible personal property and from the furnishing of certain services in Iowa. ( Sec. 423.2, Code of Iowa )

 

Iowa use tax is imposed on the use of tangible personal property or certain services in the state and does not apply if sales tax is collected. ( Sec. 423.5, Code of Iowa ; Rule 701-31.1, IAC )

KANSAS The Kansas retailers’ sales tax is imposed on retail sales, leases and rentals, specified services, and sales of admissions. The Kansas compensating use tax is imposed on the use, storage, or consumption of tangible personal property in Kansas. Cities, counties, and special taxing jurisdictions may impose local sales and use taxes. ( Sec. 79-3603, K.S.A. ; Sec. 79-3703, K.S.A. ; K.A.R. 92-20-1 )
KENTUCKY Kentucky sales tax applies to retail sales of tangible personal property and digital property, and to the provision of specified services. ( KRS Sec. 139.200 ) The use tax applies to the storage, use, or consumption of tangible personal property in Kentucky when the sales tax has not been collected. ( KRS Sec. 139.310 )
LOUISIANA Louisiana sales tax is a general tax levied on retail sales and leases of tangible personal property and on the furnishing of specified services. ( Sec. 47:302(A), La R.S.; Sec. 47:301(14), La R.S.) The Louisiana use tax is imposed on the consumption, use, distribution, or storage for use, distribution, or consumption of tangible personal property in the state. ( Sec. 47:302(A), La R.S.; Reg. 4301, LAC)
MAINE Maine sales tax is imposed on the retail sale of taxable tangible personal property and specified taxable services. Use tax is imposed on the use of taxable items and specified taxable services in Maine when the sales tax has not been paid. The service provider tax is imposed on sales of certain services, instead of sales tax.
MARYLAND Maryland sales and use tax is imposed on retail sales and uses in Maryland of tangible personal property and specifically enumerated services.

 

For a transaction to be subject to sales and use tax, the following elements must be present: (1) there must be a “retail sale” or a “use” in Maryland; and (2) the object of the sale or use must be “tangible personal property” or a “taxable service.”

MASSACHUSETTS Massachusetts sales tax is imposed on a vendor’s gross receipts from sales at retail in Massachusetts of tangible personal property and of certain services performed in the state. ( Sec. 2, Ch. 64H, G.L. ) Massachusetts use tax complements the sales tax and is imposed on the storage, use, or other consumption in the state of tangible personal property or certain services purchased from any vendor or manufactured, fabricated, or assembled from materials acquired either within or outside the state, for storage, use, or other consumption in the state. ( Sec. 2, Ch. 64I, G.L. ) Use tax does not apply to transactions that have been subject to the sales tax. ( Sec. 7(a), Ch. 64I, G.L. )
MICHIGAN The Michigan sales tax is imposed on persons engaged in the business of making sales at retail and performing specifically enumerated services. The use tax is imposed on tangible personal property purchased outside Michigan, but stored, used, or consumed in Michigan. The use tax is a complementary tax and does not apply to situations in which the Michigan sales tax has been paid.
MINNESOTA Minnesota sales tax is imposed on retail sales of tangible personal property and specified services. ( Sec. 297A.61(3), Minn Stats ; Sec. 297A.61(4), Minn Stats ; Sec. 297A.62, Minn Stats ) Minnesota use tax is imposed on the consumption, use, distribution, or storage of tangible personal property in the state. ( Sec. 297A.63(1), Minn Stats ; Rule 8130.3800, Minn Rules )
MISSISSIPPI Mississippi sales tax is a privilege tax levied on persons engaged in the business of selling tangible personal property or specified digital products or rendering taxable services in Mississippi. ( Miss Code Ann Sec. 27-65-13) The use tax is an excise tax imposed on the privilege of using, storing, or consuming, within Mississippi, any tangible personal property or specified digital product. ( Miss Code Ann Sec. 27-67-5)
MISSOURI The Missouri sales tax is imposed on retail sales of tangible personal property and certain services. The Missouri use tax is imposed on the storage, use or consumption of tangible personal property in Missouri. Counties and cities may impose a local sales and use tax. Special taxing districts (such as fire districts) may also impose additional sales taxes. ( Sec. 144.020, RSMo ; Sec. 144.610, RSMo ; 12 CSR 10-113.200 ; 12 CSR 10-103.250 )
MONTANA The state of Montana does not impose a sales, gross receipts, occupational license, or consumption tax based upon the sale or use of tangible personal property within the state or its political subdivisions.
NEBRASKA The sales tax is imposed on gross receipts. ( Sec. 77-2703(1), R.S. ; Sec. 77-2701.16, R.S. ; Reg. 1-001.01 ) Use tax is imposed on the storage, use, distribution, or other consumption of tangible personal property in the state on which sales tax has not been paid.
NEVADA The Nevada sales tax is a general tax levied on the gross receipts from sales at retail, leases, or rentals of tangible personal property and on the furnishing of specified services. ( NRS Sec. 372.060 ; NRS Sec. 372.105 ) The use tax is imposed on the storage, use or other consumption of tangible personal property in the state and is a complementary tax that does not apply in situations in which the sales tax is collected. ( NRS Sec. 372.185 )
NEW HAMPSHIRE New Hampshire does not impose a general sales and use tax but it does impose a sales-and-use-type tax on meals and rentals that was enacted by Ch. 213, Laws 1967, and codified as Chapter 78-A of the Revised Statutes Annotated.
NEW JERSEY The New Jersey sales tax is imposed on receipts from retail sales of tangible personal property or specified digital products, and sales of enumerated services. ) The compensating use tax is imposed when taxable goods and services are purchased for use in New Jersey but sales tax is either not collected or is collected at a rate less than New Jersey’s sales tax rate.
NEW MEXICO New Mexico gross receipts (sales) tax is imposed on persons who engage in business in New Mexico, including those who make retail sales of tangible personal property and services. The compensating (use) tax is imposed on persons who use tangible personal property or services rendered in New Mexico. ( NM Stat Ann Sec. 7-9-4 ; NM Stat Ann Sec. 7-9-7) New Mexico also imposes a governmental gross receipts tax on New Mexico agencies, institutions, instrumentalities, and political subdivisions except certain entities licensed by the Department of Health and school districts.
NEW YORK New York sales tax is imposed on retail sales of taxable tangible personal property and specified taxable services. Use tax is imposed on the use of taxable items and specified taxable services in New York when the sales tax has not been paid.
NORTH CAROLINA North Carolina sales tax is a privilege tax levied on a retailer’s net taxable sales or gross receipts from sales at retail, leases or rentals of tangible personal property. ( Sec. 105-164.4, G.S.; Sec. 17:07B.4401, N.C. Adm. Code) The use tax is imposed on the storage, use, or consumption in North Carolina of tangible personal property, including property that becomes part of a building or other structure in the state. ( Sec. 105-164.6, G.S.)
NORTH DAKOTA North Dakota sales tax is imposed on retail sales of tangible personal property and specified services. ( Sec. 57-39.2-02.1(1), NDCC ; Sec. 57-39.2-02.1(2)(a), NDCC ) North Dakota use tax is imposed on the storage, use, or consumption of tangible personal property in the state. Exemptions from the sales tax also apply to the use tax. ( Sec. 57-40.2-02.1, NDCC ; Sec. 57-40.2-04(15), NDCC )
OHIO Ohio sales tax is imposed on the retail sale of tangible personal property or specified services in the state. Ohio use tax is levied on the storage, use, or other consumption in the state of tangible personal property or the benefit realized in the state of any specified service provided.

 

A separate tax (retailer’s tax) is imposed on vendors or sellers for the privilege of engaging in the business of making retail sales in the state, but this retailers’ tax is offset against the consumers’ sales and use taxes collected and remitted by the vendor or seller to the state. The retailers’ tax is not an independent tax and merely is intended to ensure that vendors or sellers collect and remit the consumers’ taxes.

OKLAHOMA Oklahoma imposes a general sales tax on the sale or lease or rental of tangible personal property and on a broad range of specified services. The use tax is imposed on the storage, use, or other consumption in Oklahoma of tangible personal property. ( 68 O.S. Sec. 1354(A) ; 68 O.S. Sec. 1402 )
OREGON The state of Oregon does not impose any form of sales, gross receipts, occupational license, use, or consumption tax on the basis of the sales or use of tangible personal property within the state.
PENNSYLVANIA Pennsylvania sales tax is imposed on retail sales of tangible personal property and specified services. (Sec. 202(a), Act of March 4, 1971, P.L. 6, [72 P.S. §7202(a)] ; Reg. Sec. 31.1 ) Pennsylvania use tax is imposed on the use in Pennsylvania of tangible personal property or certain services purchased outside the state. (Sec. 202(b), Act of March 4, 1971, P.L. 6, [72 P.S. §7202(b)] ; Reg. Sec. 31.1 ; Reg. Sec. 31.7(a) )

 

Purchases of tangible personal property or taxable services are presumed taxable unless the user proves that the predominant purpose for which the property or service is used is not taxable.

RHODE ISLAND Rhode Island imposes a sales tax on retail sales or rentals of tangible personal property and specified services. A compensating use tax is imposed on the storage, use, or other consumption in Rhode Island of tangible personal property, including a motor vehicle, boat, airplane, or trailer.
SOUTH CAROLINA The South Carolina sales tax is imposed on persons engaged in the business of selling tangible personal property and certain specified services in South Carolina. Use tax is imposed on the storage, use, or consumption in South Carolina of tangible personal property and on specified services.
SOUTH DAKOTA South Dakota imposes a general sales tax on retailers for the privilege of selling, leasing, or renting tangible personal property at retail in South Dakota and on persons selling, performing, or furnishing designated services at retail to consumers or users in South Dakota. ( Sec. 10-45-2, SDCL ) South Dakota use tax is imposed on the storage, use, or other consumption in South Dakota of tangible personal property or taxable services purchased for use in South Dakota. ( Sec. 10-46-2, SDCL ; Sec. 10-46-2.1, SDCL )
TENNESSEE Tennessee sales tax is a privilege tax imposed on the retail sale or the leasing of tangible personal property sold in Tennessee. ( Sec. 67-6-201, T.C.A.; Sec. 67-6-202, T.C.A.; Sec. 67-6-204, T.C.A.) Tennessee use tax is imposed on the privilege of using, consuming, distributing, or storing tangible personal property in Tennessee, unless the property is in interstate commerce. ( Sec. 67-6-201, T.C.A.; Sec. 67-6-203, T.C.A. ; Sec. 67-6-211, T.C.A.)
TEXAS Texas sales tax is imposed on sales and leases of tangible personal property and specified services within the state unless a specific exemption applies. ( Sec. 151.005, Tax Code; Sec. 151.010, Tax Code) The Texas use tax is a complementary tax imposed on the storage, use, or other consumption in the state of tangible personal property or specified services purchased from a retailer. ( Sec. 151.011, Tax Code; Sec. 151.101, Tax Code)
UTAH Utah sales tax is imposed on the retail sale of taxable tangible personal property and specified taxable services. Use tax is imposed on the use of taxable items and specified taxable services in Utah when the sales tax has not been paid.
VERMONT Vermont sales tax is imposed on retail sales of tangible personal property and specified services. Vermont use tax is imposed on the use of tangible personal property in the state. ( 32 V.S.A. Sec. 9771 ; 32 V.S.A. Sec. 9773 ; Reg. 1.9773 )

 

All amounts received for taxable tangible personal property or services are presumed taxable. Persons required to collect the tax have the burden of proving that a receipt or amusement charge is not taxable. ( 32 V.S.A. Sec. 9813 )

VIRGINIA Virginia retail sales tax is imposed on persons engaged in the business of selling at retail, distributing, renting, or furnishing tangible personal property in Virginia. ( Sec. 58.1-603, Code ) Virginia use tax is imposed on the use, consumption, or storage of tangible personal property in Virginia. ( Sec. 58.1-604, Code )
WASHINGTON Washington sales tax is imposed on each retail sale or lease in the state of tangible personal property and specified services. Specifically, sales tax is imposed on the following:

·        tangible personal property, unless the sale is specifically excluded from the definition of retail sale ;

·        digital goods, digital codes, and digital automated services, if the sale is included within the definition of retail sale;

·        services, other than digital automated services, included within the definition of retail sale;

·        extended warranties to consumers; and

·        anything else, the sale of which is included within the definition of retail sale.

Use tax is imposed on every consumer who uses an article of tangible personal property in the state acquired in a manner that triggers the tax.

 

The business and occupation tax (B&O) is imposed for the act or privilege of engaging in business activities. Many of the business and occupation tax statutes and rules, including definitions of terms, also apply to the sales and use tax.

WEST VIRGINIA West Virginia imposes the consumers sales and service tax on the sale of tangible personal property, custom software, and most services. ( W.Va. Code Sec. 11-15-3(a) ) The use tax is imposed on the use in West Virginia of tangible personal property, custom software, and non-exempt services. ( W.Va. Code Sec. 11-15A-2(a) )
WISCONSIN Wisconsin sales tax is imposed on retail sales of tangible personal property and specified services. ( Sec. 77.52(1), Wis. Stats. ; Sec. 77.52(2), Wis. Stats. ) Wisconsin use tax is imposed on the storage, use, or other consumption of tangible personal property in the state. ( Sec. 77.53(1), Wis. Stats. ; Sec. 77.53(1b), Wis. Stats. )

The sale, license, lease, or rental of a product may be taxed only once, regardless of whether the transaction is taxable under more than one provision imposing a tax. ( Sec. 77.61(20), Wis. Stats. )

WYOMING The Wyoming sales tax is imposed on the sales price of retail sales or leases of tangible personal property, specified digital products, and enumerated services. (Sec. 39-15-103, W.S.) The use tax is imposed on the purchase or lease of tangible personal property or specified digital products outside Wyoming for use, storage, or other consumption within Wyoming. ( Sec. 39-16-103(a), (b), and (c), W.S.; Sec. 39-16-105(a)(v)(A), W.S.)
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AUTHOR

Jerome Nestor

Jerome Nestor, Esq., CPA, MBA-Accounting Information Systems Manager Tax & Accounting North America Wolters Kluwer Mobile: +1 847.312.5671 Email: jerry.nestor@wolterskluwer.com

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