Sales and use taxes

Sales and use taxes are used by governments to derive income from the sale of tangible personal property. These taxes are a common source of revenue for state governments, and sometimes also at the county and city levels. There may also be incremental additions to this tax that are intended to last for a short period of time, until an underlying expenditure has been paid off. For example, there may be a short-term addition to the sales tax by a city that wants to make a one-time payment for a sports stadium.

The amount of sales tax to be paid is calculated by multiplying the amount paid for goods or services by the tax rate; this calculation only applies to sale transactions arising within the jurisdiction governed by the taxing entity.

The application of sales tax to all sale transactions is by no means comprehensive. Instead, each government jurisdiction has its own rules for which types of sales may be excluded, such as for the sale of food. This can make it difficult for a business to keep track of sales tax inclusions and exclusions on an ongoing basis.

The process flow for a sales tax transaction is for a business to charge the sales tax to its customers, which the business is then responsible for remitting to the applicable government. This usually means that all sales taxes are sent to the tax division of the state government, which then forwards that portion of the sales tax owed to the county and city governments to those entities.

If a business does not collect sales taxes from its customers, the  business is still liable for the sales tax, and must remit it to the state government. If this occurs, the company still has the option to force its customers to pay the sales tax after the fact. If the reverse occurs and the company overcharges its customers for sales taxes, the excess amount collected must also be forwarded to the state government. In essence, a business has primary responsibility for sales tax collection, which is rigorously enforced.

Sales Tax Remittance Frequency

The revenue division of the state government decides how frequently it wants to have sales taxes remitted to it. Normally, remittances are once a month. However, if a business collects a minimal amount of sales tax, the revenue division may allow a quarterly or even an annual remittance schedule. If the amount of remittances later increases, then the government can increase the required remittance frequency.

Sales Tax Audits

Since the sales tax is one of the main forms of income for many governments, it should be no surprise that they routinely conduct audits of companies to ensure that the correct amounts are remitted. The audits can be conducted by any government that believes a company owes it sales taxes, so the number of these audits to which a business can be subjected is theoretically unlimited.

Use Taxes

A business must collect sales taxes if nexus is present. If not, the entity buying the goods or services is instead liable to the government for this tax. However, if the buyer pays the tax, it is now called a use tax, rather than a sales tax. The amount to be paid is identical to the amount that would have been payable if the tax had been collected by the seller. Taxing authorities have been known to audit the buyers of goods and services for unpaid use taxes with considerable success. Thus, a business may be on the receiving end of both use tax and sales tax audits.

The Sales Tax Exemption Certificate

Sales taxes are not required when the buyer of goods intends to include them in its own products, which will then be sold to another party. Thus, only the final party to buy the goods is required to pay the sales tax.

A seller should only skip a sales tax billing to a customer when the customer produces a sales tax exemption form (sometimes called a resale certificate). The seller should keep this form on file, in case sales tax auditors question the missing tax. A government that buys goods and services may also have a sales tax exemption certificate, since few governments are required to pay sales taxes.

Related Courses

Sales and Use Tax Accounting