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Thursday, July 28, 2011

Basics of Sales and Use Tax


Sales tax is an excise levied on the exchange of tangible personal property and selected services sold at retail. Most people would describe it as the tax we pay when we buy stuff. 

The golden rules in approaching any sales tax include the following: 
  1. Is the transaction a sale?  To determine whether the exchange or transfer constitutes a sale.  Most definitions of a "sale" say that it is an exchange of property for consideration involving any transfer of title or possession or both by any means whatsoever. A sale is the act of selling a product or service in return for money or other compensation.  
  2. What is the subject of the sale?  To evaluate of whether the subject of the sale (tangible personal property, service, etc.) is taxable or not.  If the item sold is tangible personal property, it is, by definition, subject to sales tax. However, if a taxpayer claims that the sale is exempt from tax, the taxpayer bears the burden of proof for the exemption or exclusion. Most state statutes with respect to service sales; however, states can distinguish specific services which are taxable.
  3. What is the sales price?   This step requires determining the sales price. The variables in defining sales price include trade-ins, discounts, rebates, finance charges, delivery, freight, handling, returns and allowances, and installation costs to name only a few. Whether and when these items are included or excluded from the taxable sales price can vary not only from state to state, but from transaction to transaction. Freight and delivery charges, for example, are often thought of as nontaxable service sales. However, most states tax freight if the freight or delivery charges are necessary to consummate the sale. If a sale is made FOB destination (indicating that title passes after delivery) it is likely that sales tax is due on the total price of the property including shipping. A sale made FOB shipping point (indicating that title passes before delivery), however, may allow the freight charges to be excluded from the tax base. 
  4. Whose tax do I have to collect?  Assuming the sale is taxable, what jurisdiction, if any, has the right to require collection and remittance by the seller? The location of a transaction for sales and use tax purposes is generally the location where the property is delivered to the buyer. This issue is not only pertinent to businesses but comes up frequently for individuals.  Any items purchased by an individual through mail order, assuming the article is subject to tax and no other exemptions apply, should be taxed. If the seller is not licensed to collect the sales tax, the item is typically acquired free of sales tax. The tax charged is generally that imposed by the jurisdiction where the property is delivered. The jurisdiction where the property is delivered may not be a jurisdiction where the seller has any property, employees, or other business contacts. Accordingly, the seller may not be required to license herself for collecting the sales tax. Therefore, the transaction very likely may not be taxed by the seller. However, the purchaser would have an obligation to pay the equivalent use tax.  
  5. Do I have a legal responsibility to file a return?  When business obtains sales and use tax permit, it will be instructed to file its tax return on a monthly, quarterly, or yearly basis (the determination is based on the volume of sales expected for your business). This filing requirement will be adjusted based on the amount of taxes that you actually collect. Most businesses will file monthly returns, but depending on how much tax your business collects, you might qualify to file quarterly or yearly returns.  
  6. Interstate Sales Info:  If the business does not have any physical presence in the state, it does not have a collection obligation. So, if the only activity your business has in a state is through mail order, either by catalog or over the Internet, you do not have a filing obligation with that state. 
 Use Tax Is The Complement to Sales Tax:   Every state that has a sales tax has a complementary use tax. While the sales tax is assessed on retail sales, the use tax is assessed on the storage, use, or consumption of tangible personal property purchased at retail and upon which no sales tax was paid. The effect is to create a level-playing field between in-state and out-of-state retailers. Without a use tax, sales tax could be circumvented by purchasing articles outside of a taxing jurisdiction.

 Registration and Filing Requirements:   Most states require the seller to collect the sales tax from the purchaser. Failure to do so can result in the seller being held liable for the tax it failed to collect. Assuming a business has sufficient contacts in a state so that it must register to collect sales and use tax, the company must abide by that jurisdiction's rules with respect to collection, accounting methods to be used, filing and deposit requirements, and other pertinent rules.   

Items Subject to Tax:  The general rule for most states is that sales of tangible personal property are taxed and services are not taxed unless specifically included. Unless a taxpayer can point to a specific exclusion or exemption. A sale of tangible personal property is presumed to be taxable. Services, however, are presumed nontaxable unless specifically identified by statute.

Exclusions and Exemptions:  There are numerous exclusions and exemptions to the imposition of a sales or use tax. Generally speaking, exclusions are those items that by definition are not subject to tax. Exemptions on the other hand, are specific statutory exceptions that exist as a matter of legislative grace. For example, prosthetic medical devices are often specifically exempted from sales and use tax. Exclusions and exemptions have been categorized into four areas:
  1. Nature of the purchaser
  2. Nature of the seller
  3. Nature of the product being sold
  4. Purchaser's intended use of the property
Georgia definition Tangible Personal Property in the sales tax statutes.
Code of Georgia 48-8-2
"Tangible personal property" means personal property which may be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. "Tangible personal property" does not mean stocks, bonds, notes, insurance, or other obligations or securities.

 

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