Sales & Use Tax Foundations (Part 4) – Taxable Transactions

Sales Tax Foundations

Part IV:  Basic Questions and Answers about State Sales and Use Tax:  Taxable Transactions

In our last blog, Part III: Basic Questions and Answers about State Sales and Use Tax: Constitutional Rights, we focused on the third of our foundational sales and use tax topics — what are the constitutional limitations on sales tax laws, aimed primarily at the non-tax specialist, who is often challenged by the complexities of sales and use taxation. In this blog, we ask and answer some basic questions about the topic — what are taxable sales and use tax transactions?

Question 1: What constitutes a taxable transaction?

Presumption of taxability. Although each state must be researched, in most states, it is presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a retail sale is upon the person making the sale, unless he or she obtains a certificate from the purchaser indicating that the property is purchased for resale.

Question 2: Sales for Resale

Sales for resale are generally exempt from sales or use tax. The sales tax applies only to retail sales generally defined as a sale for any purpose other than resale in the regular course of business, while the use tax is generally imposed on the storage, use, or other consumption in the state of tangible personal property purchased from a retailer.

Question 3: What defines taxable use?

The use tax is generally imposed on the storage, use, or other consumption in the state of tangible personal property purchased from a retailer.

Question 4: What are the general categories of exclusions and exemptions?

Exemptions to sales and use taxes are expressed in several ways: (1) explicitly, e.g., items considered a part of the manufacturing process; (2) as exceptions to the definition of a taxable sale or tangible personal property; or (3) as exclusions from a taxable category of transactions. Exemptions may be granted based on the nature of the product (such as food), the type of transaction (such as a resale), or the nature of the entity selling or buying the product (such as a charitable organization).

 [Read more if you want to review a chart that provides more specific state rules on taxable transactions.]

Taxable Transactions: Presumption of Taxability — State-Specific Rules

STATE RULE
ALABAMA Presumption of Use taxability. It is presumed that all tangible personal property sold for delivery in the state is for storage, use, or consumption in Alabama, unless evidence is available that the sale was for resale. Nonresident vendors are not, however, required to collect tax on property delivered outside Alabama.
ARIZONA Presumption of taxability. For purposes of the transaction privilege tax, it is presumed that all gross proceeds of sales and gross income derived by a person from business activity classified under a taxable business classification comprise the tax base for the business until the contrary is established. ( Sec. 42-5023, A.R.S. )

 

The transaction privilege tax is the responsibility of persons carrying on business activities that fit within taxable classifications, most commonly the retail classification. ( Sec. 42-5008, A.R.S. ) If the seller imposes an added charge to cover the tax, the seller cannot remit less than the amount collected to the state. ( Sec. 42-5002, A.R.S. )

ARKANSAS Liability for use tax. Every person storing, using, or consuming tangible personal property, a taxable service, specified digital products (effective January 1, 2018), or a digital code (effective January 1, 2018) in Arkansas that is purchased from a vendor is liable for the use tax. ( Sec. 26-53-123, A.C.A.) Every vendor making a sale of tangible personal property, a taxable service, specified digital products (effective January 1, 2018), or a digital code (effective January 1, 2018) for storage, use, distribution, or consumption in Arkansas must collect use tax from the purchaser. ( Sec. 26-53-124, A.C.A.)

 

However, the extent to which Arkansas can compel vendors located outside the state to collect Arkansas tax is limited by the Commerce Clause, Due Process Clause, and other provisions of the U.S. Constitution, and court cases interpreting them.

CALIFORNIA Presumption of taxability. It is presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a retail sale is upon the person making the sale, unless he or she obtains a certificate from the purchaser indicating that the property is purchased for resale.
COLORADO Presumption of taxability. Sales tax applies to all retail sales of tangible personal property except those expressly exempted from tax or excepted from the definition of “retail sale” or “sale.” A retailer is responsible for collecting and remitting the tax and has the burden of showing that a sale is exempt. A retailer must have sufficient records to demonstrate the validity of a claimed exempt sale. ( Sec. 39-26-105(1)(c), C.R.S. ; Reg. 39-26-105.1(c) )
CONNECTICUT Presumption of taxability. There is a presumption that every sale or other transfer of title of tangible personal property is taxable. All gross receipts are presumed to be subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property or service is not a retail sale is upon the seller, unless the seller takes from the purchaser a resale certificate. Therefore, sales or use tax liability exists unless an exemption applies to the transaction. However, the same presumption does not apply to service transactions. Only enumerated services performed for consideration are taxable. Services that are not listed or not performed for consideration are not taxable.
DISTRICT OF COLUMBIA Presumption of taxability. All sales of tangible personal property in the District are presumed to be taxable at the time of sale, even if the property is subsequently used, stored, or consumed outside the District.

Presumption of taxability. The storage, use, or consumption of property in the District is taxable unless the purchaser proves that the property was not purchased to be stored, used or consumed in the District.

FLORIDA Presumption of taxability. Every sale, lease, or rental is presumed taxable, unless it is specifically exempt. The exempt nature of the transaction must be established by the selling dealer.
GEORGIA All sales made by a retailer are subject to tax until the contrary is established. The person making the sale has the burden of proving that a sale is not a retail sale unless an exemption certificate is accepted from the purchaser stating that the purchase is for resale or is otherwise exempt.
IDAHO Presumption of taxability. All sales are presumed to be taxable. The burden of proving that a sale is not subject to tax is on the seller unless the seller obtains a resale certificate or exemption certificate from the purchaser. ( IC Sec. 63-3621(e); IC Sec. 63-3622(a))
ILLINOIS Presumption of taxability. All sales of tangible personal property are presumed subject to sales tax and SOT. The person required to remit the tax has the burden of proving that a transaction is not taxable. ( 35 ILCS 120/7 ; 35 ILCS 115/4)

 

Presumption of taxability. The sale of property for delivery to a person residing or engaged in business in Illinois is presumed to be subject to use tax and SUT. ( 35 ILCS 105/4 ; 35 ILCS 110/4 )

INDIANA Presumption of taxability. In general, a customer who buys tangible personal property from a retail merchant for delivery in Indiana is liable for tax on the purchase unless:

·        the retail merchant receives an exemption certificate from the customer; or

·        the customer or seller produce evidence to rebut the presumption.

KANSAS Presumption of taxability. Each retail sale is presumed taxable. ( K.A.R. 92-19-61a(c) ) Either the amount of tax on a sale must be separately stated on the invoice or bill, or the invoice or bill must state “All applicable sales tax is included.” If this requirement is not met, the presumption is that the retailer did not collect the tax. ( Sec. 79-3648, K.S.A. )
KENTUCKY Presumption of taxability. It is presumed that all gross receipts from the sale of tangible personal property and digital property are subject to sales tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a retail sale is on the person who makes the sale, unless that person takes from the purchaser a certificate showing that the property is (1) purchased for resale; (2) purchased through an exemption certificate; or purchased under a direct pay authorization. ( KRS Sec. 139.260 ) Effective July 1, 2018, the presumption also applies to the sale of taxable services, unless the seller takes from the purchaser a fully completed exemption certificate. ( KRS Sec. 139.260 )
MAINE Presumption of taxability. All transactions are taxable unless the person charged with tax liability on the transaction can show the transaction was not taxable.
MARYLAND Presumption of taxability. There is a presumption that any sale in the state is subject to the sales or use tax. The person required to pay the tax has the burden of proving that the sale is not taxable. ( Sec. 11-103, Tax General Art. ; Reg. 03.06.01.14 )
MASSACHUSETTS Presumption of taxability. All gross receipts of a vendor from the sale of services or tangible personal property are presumed to be from taxable sales. Similarly, sales of tangible personal property or services by any person for delivery in the state are presumed to be sales for storage, use, or other consumption in the state. The burden of rebutting these presumptions is on the seller unless the seller accepts a resale certificate or an exempt use certificate from the purchaser. ( Sec. 8, Ch. 64H, G.L. ; Sec. 8, Ch. 64I, G.L. )

 

Presumption of taxability. It is presumed that tangible personal property shipped to or brought into the state by a purchaser is purchased from a retailer for storage, use, or other consumption in the state if the property is shipped to or brought into the state within six months of its purchase. Similarly, services are presumed to have been purchased from a vendor for use in the state if the services are used in the state within six months of their purchase. If property is shipped to or brought into, or a service is used in, the state more than six months after its purchase, the burden is on the Commissioner of the Department of Revenue to prove that the property or service was purchased for use in Massachusetts. ( Sec. 8(f), Ch. 64I, G.L. )

MINNESOTA All retail sales for delivery in Minnesota are presumed to be for storage, use, or other consumption in Minnesota until the contrary is established. To overcome this presumption, a purchaser must prove that property it shipped or brought to Minnesota was not purchased from a retailer for storage, use, or consumption in Minnesota. ( Sec. 297A.665(a), Minn Stats ; Sec. 297A.665(e), Minn Stats )
MISSOURI Presumption of taxability. There is a presumption that property sold by a vendor for delivery into Missouri is sold for storage, use, or consumption in Missouri unless a resale exemption certificate is presented by the purchaser. ( Sec. 144.620, RSMo ; 12 CSR 10-4.120 )
NEBRASKA Presumption of taxability. All gross receipts are presumed to be subject to sales tax until the contrary is established. The burden of proving that a sale is exempt is on the retailer, unless it takes in good faith from the purchaser a resale, exemption certificate, or a direct payment permit. ( Sec. 77-2703(1)(f), R.S. ; Reg. 1-070 )

 

Presumption of taxability. A sale, lease, or rental of tangible personal property by a person for delivery in Nebraska is presumed to be for storage, use, or other consumption in the state until the contrary is established. The person who purchased, leased, or rented the property has the burden of proving otherwise. ( Sec. 77-2703(2)(e), R.S. ; Reg. 1-002.02 ; Reg. 1-070.04 )

NEVADA Presumption of taxability. All gross receipts are presumed to be subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a retail sale is upon the person making the sale, unless that person accepts a resale certificate from the purchaser. ( NRS Sec. 372.155 )

 

Presumption of taxability. Tangible personal property sold by any person for delivery within Nevada is presumed to be sold for storage, use, or other consumption within the state until the contrary is established. The burden of proving the contrary is upon the person who makes the sale, unless the seller receives a resale certificate from the purchaser. ( NRS Sec. 372.225 )

NEW MEXICO Presumption of taxability. All receipts of a person engaging in business are presumed to be subject to the gross receipts tax.

Presumption of taxability. Property bought or sold for delivery into New Mexico is presumed to be taxable.

 

NEW YORK Presumption of taxability. All receipts of tangible personal property and specified services, all rents for occupancy and all amusement charges are presumed taxable, unless the contrary is established. The burden of proving exemption from tax is imposed on the person required to collect tax or the purchaser of the goods or services. However, where a properly completed resale certificate, exempt use or exempt organization statement has been furnished to the vendor, the burden of proof as to non-taxability of a receipt, amusement charge or rent is shifted to the purchaser.

 

In addition, New York has a rebuttable presumption that certain sellers of taxable tangible personal property or services, using New York residents to solicit sales in the state, are sales tax vendors that are required to register for sales tax purposes and collect state and local sales taxes. ( Sec. 1101(b)(8)(vi), Tax Law ) ( TSB-M-08(3)S ; TSB-M-08(3.1)S ) For a complete discussion of the rebuttable presumption, see Nexus—Doing Business in New York .

NORTH CAROLINA Presumption of taxability. Certain presumptions apply:

·        all gross receipts of wholesale merchants and retailers are subject to the retail sales tax until the contrary is established by proper records;

·        tangible personal property sold by a person for delivery in the state is sold for storage, use, or other consumption in North Carolina;

·        tangible personal property delivered outside the state and brought to North Carolina by the purchaser is for storage, use, or consumption in the state;

·        digital property sold for delivery or access in the state is sold for storage, use, or consumption in North Carolina; and

·        a service purchased for receipt in the state is purchased for storage, use, or consumption in North Carolina.

NORTH DAKOTA Evidence that tangible personal property was sold for delivery in North Dakota is considered sufficient to establish that the property was sold for use in North Dakota. ( Sec. 57-40.2-05, NDCC )
OHIO It is presumed that all sales made in Ohio are subject to sales tax unless the contrary is established.
OKLAHOMA Presumption of taxability. For sales tax purposes, all gross receipts are presumed taxable unless shown to be exempt. The burden of proving that a sale of tangible personal property or a taxable service is an exempt sale is on the vendor. ( Rule 710:65-1-4 )

 

Presumption of taxability. For use tax purposes, it is presumed that tangible personal property sold, leased, or rented by any person for delivery in Oklahoma is sold, leased, or rented for storage, use, or other consumption in Oklahoma. The burden of proving the contrary is on the purchaser.

PENNSYLVANIA 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. (Sec. 201(k)(9), Act of March 4, 1971, P.L. 6, [72 P.S. §7201(k)(9)], ¶100-002; Sec. 201(o)(5), Act of March 4, 1971, P.L. 6, [72 P.S. §7201(o)(5)] ; Reg. Sec. 32.3(b) ) Various Pennsylvania regulations indicate that “predominant” means more than 50%. ( Reg. Sec. 32.1 ; Reg. Sec. 32.33 ; Reg. Sec. 32.34 ; Reg. Sec. 32.35 )
RHODE ISLAND Presumption of taxability. It is presumed that all gross receipts are subject to sales tax. The burden of proving the contrary is upon the person who makes the sale and the purchaser, unless the person making the sale accepts a resale certificate from the purchaser.

 

Presumption of taxability. It is presumed that the use of all tangible personal property is subject to the use tax, and that all tangible personal property intended for delivery in Rhode Island is delivered for storage, use, or consumption in Rhode Island until the contrary is established. The burden of proving the contrary is upon the person who makes the sale and the purchaser, unless the person who makes the sale takes from the purchaser a certificate to the effect that the purchase was for resale.

SOUTH CAROLINA Presumption of taxability. There is a presumption that all gross proceeds are subject to sales tax until the contrary is established. A seller has the burden of showing that a sale is not a sale at retail. However, if the seller receives a resale certificate from the purchaser, the burden shifts to the purchaser.

 

Presumption of taxability. Property received in the state by its purchaser is presumed to have been purchased for storage, use, or consumption in the state. It is also presumed that all tangible personal property sold for delivery in the state is sold for storage, use, or consumption in the state, unless the seller obtains a resale certificate from the purchaser.

SOUTH DAKOTA Presumption of taxability. All retail sales and services are presumed taxable unless specifically exempt by law. ( Sec. 10-45-4, SDCL ; Sec. 10-46-2.1, SDCL ) When a service is performed on tangible personal property within a taxing jurisdiction, the beneficial use of the service is presumed to occur within the taxing jurisdiction and the service is subject to both the state and any applicable local sales tax. ( Rule 64:06:02:81, ARSD ) The burden of proving that a sale is exempt from sales tax is on the vendor. ( Rule 64:06:01:15, ARSD )

 

Presumption of taxability. Evidence that tangible personal property was sold for delivery in the state is prima facie evidence that the property was sold for use in the state. ( Sec. 10-46-18, SDCL ) Similarly, evidence that a service was used in the state is prima facie evidence that the service is subject to tax. ( Sec. 10-46-18.1, SDCL )

TEXAS Presumption of taxability. A sale of a taxable item for delivery in Texas is presumed to be a sale for storage, use, or consumption in Texas unless the seller accepts a resale or exemption certificate. ( Sec. 151.104, Tax Code) Similarly, a taxable service that is used in Texas is presumed to have been purchased for use in Texas. ( Sec. 151.105(b), Tax Code) The presumption continues for one year after purchase. The burden of proving that the sale is not for storage, use, or consumption in Texas is on the person making the sale.

 

A contrary presumption applies to items purchased outside Texas and used outside the state for more than one year before the date of entry into Texas; such items will be presumed not to have been purchased for use in Texas. ( 34 TAC Sec. 3.346(c)(5))

UTAH Presumption of taxability. All sales of tangible personal property are taxable unless the vendor receives an exemption certificate from the purchaser.
VERMONT 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 Presumption of taxability. Sales and leases are presumed taxable until proven otherwise. Unless the dealer receives an exemption certificate from the taxpayer, the dealer has the burden of proving that the sale, lease, distribution, or storage of tangible personal property is not taxable. ( Sec. 58.1-623(A), Code ; 23 VAC 10-210-280 )
WASHINGTON Presumption of taxability. Unless the seller takes a reseller permit from the buyer, the burden of proving that a sale is a wholesale sale and not a sale at retail is on the person making the sale. In addition to a reseller permit, a seller may accept from a buyer that is not required to be registered with the Department, a uniform sales and use tax exemption certificate from the multistate tax commission, or a uniform exemption certificate approved by the streamlined sales and use tax agreement (SST) governing board, or any other exemption certificate authorized by the department. Instead of a reseller permit, a seller may accept from a buyer that is required to be registered with the Department, a uniform exemption certificate approved by the SST agreement governing board or any other exemption certificate authorized by the department, as long as the certificate contains the buyer’s permit number. In lieu of a reseller permit, a seller may also obtain the relevant data elements from the buyer as permitted by the SST agreement.

 

A seller that maintains records establishing that it uses electronic means to verify the validity of its customers’ reseller permits, at least once per calendar year, is not required to obtain a copy of a reseller permit or other documentation for wholesale sales that occur within 12 months of the date the seller last electronically verified the customer’s reseller permit.

WEST VIRGINIA Presumption of taxability. All sales and services are presumed to be subject to consumers sales and service tax until the contrary is clearly shown. The burden of proving that a sale was not taxable is on the seller. ( W.Va. Code Sec. 11-15-6 ; W.Va. Code Sec. 11-15A-18 ; Reg. Sec. 110-15-6 )
WISCONSIN All receipts are presumed taxable. Sellers generally have the burden of proving that a receipt is not taxable, unless the seller obtains from the purchaser a certificate showing that the property or service is purchased for resale or is otherwise exempt. However, no certificate is required for certain exempt products.

 

Tangible personal property, other taxable items, and taxable services sold by any person for delivery in Wisconsin are presumed to be sold for storage, use, or other consumption in Wisconsin. Sellers generally have the burden of proving that a transaction is not taxable, unless the seller obtains from the purchaser a certificate showing that the property or service is purchased for resale or is otherwise exempt. However, no exemption certificate is required for certain exempt products.

 

In addition, tangible personal property or taxable services shipped or brought to Wisconsin are presumed to have been purchased from or serviced by a retailer. Any person purchasing from a retailer is deemed to be the consumer of the tangible personal property or services purchased.

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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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