Sales and use tax generally refer to a percentage tax on the price of a sale that is collected by a merchant or consumer and remitted to the government. However, there are subtle differences in how these taxes are collected and remitted. Sales and use tax rates can vary from state to state and locality to locality, so it is important to understand the difference between them as well as how to properly calculate, collect, and remit both taxes.
The management of sales and use tax compliance can be complicated as time and labor-intensive process prone to errors and inaccuracies. As a result, many businesses opt for outsourcing sales and use tax to summarize, compare and transform data from multiple sources in the fastest and most accurate way possible.
Sales tax is a transaction tax, calculated as a percentage of the sales price of taxable goods and certain taxable services. Businesses with nexus, meaning they have a physical presence or have reached the threshold of economic transactions or sales in that state, need to charge state sales tax.
Sales tax is usually imposed on the consumer or purchaser, but some sales taxes are imposed on the seller and called a transaction privilege tax. In either case, this tax is typically collected by the seller from the purchaser and remitted to the state by the seller. The tax is usually imposed on sales of tangible personal property and selected enumerated services. If a consumer of a state makes a taxable purchase within their own state, the full sales tax is paid at the time of the transaction.
Sellers Use Tax
Sellers use tax is another term for sales tax that is calculated as a percentage of the sales price, and remitted by an out-of-state seller to the state. Sellers use tax applies to remote sellers who are generally defined as businesses that have nexus in the state but who are not based in the state.
Also, sellers use tax sometimes is not filed on a sales tax return. Instead, it is filed on a separate return called a sellers use tax return, vendors use tax return, or retailers use tax return. However, the sellers use tax rate is the same as the sales tax rate, which may include local sellers use tax.Use this detailed guide to stay ahead of different tax complexities, understand your obligations, and ensure tax compliance in different jurisdictions.
Use Tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is a complementary or compensating tax to the sales tax and does not apply if the sales tax was charged.
Use tax applies to purchases made outside the taxing jurisdiction but used within the state. It also applies to items purchased exempt from tax which are subsequently used in a taxable manner.
There are two types of use taxes: Consumer Use Tax and Vendor or Retailer Use Tax. Vendor or Retailer Use Tax applies to sales made by a vendor to a customer located outside the vendor’s state or sales in interstate commerce if the vendor is registered in the state of delivery.
Consumer Use Tax
Consumer use tax is complementary to the sales tax and is sometimes referred to as a compensating use tax. It is imposed by state and local governments and calculated as a percentage of the sales price of goods and certain services, but paid as a use tax. Typically, consumer use tax is imposed on transactions that are subject to sales tax, but the tax was not charged. This usually occurs when items are purchased out-of-state, ordered through the mail, over the Internet, or by phone from another state.
Consumer use tax is imposed to prevent someone from evading a sales tax by buying goods or taxable services from a non-taxing state and shipping them into the state that imposes the sales tax. The use tax protects retailers located in the state or municipality because it removes the incentive for consumers to shop outside that locality in order to avoid paying the sales tax.
Benefits of Sales and Use Tax Outsourcing
Nearly every transaction of goods and many service transactions come with an added charge for sales or use tax. For businesses, overpayments of sales and use tax are additional costs, and efficiently managing these costs aligns with the effective financial management of the business, and can save significant time and money. Therefore, businesses need to review tax compliance processes to identify opportunities to enhance, streamline, and automate the sales and use tax function. Accordingly, they can improve sales and use tax management, strengthen internal controls, and reduce the cost of compliance.
Outsourcing sales and use tax compliance provide identifying and adopting best practice methodologies specifically suited to different businesses’ activities. As a result, they can experience different benefits, such as streamlined data, reduced tax liability and audit risk, meeting return deadlines, tight internal controls, increased tax return accuracy, and reduction in overall internal costs. Without the ongoing burden of sales and use tax compliance, businesses can instead spend time and resources working on more complex issues, revenue-generating projects, or proactive tax planning, as activities that directly contribute to improved bottom-line results.Even though terms payroll tax and income tax are used interchangeably, they are separate types of tax and employers need to understand the differences between them to achieve maximum tax compliance.
Reaching Sales and Use Tax Compliance
Accurate sales and use tax compliance represents a challenge for many businesses due to varying state filing deadlines as well as the state-specific format requirements. Given the potential exposure that can result from incorrect filling, significant penalties, and increased audit scrutiny, effective handling of sales and use tax compliance is critical for every business. Otherwise, they can face significant risks, including fines, workflow disruption, and damaged reputation.
Whether managing exemptions, calculating rates, determining applicable tax, or establishing nexus, sales and use tax workflows can be time-consuming, confusing, costly, and risky. On the other hand, automating features for evaluation, exemption management, calculation, filing, remittance, and recovery ensure that accurate data is collected and utilized, while nexus is automatically determined. Also, such an approach improves tax compliance as it allows tax professionals to stay current with changing rates and taxability across all jurisdictions. With these improvements, organizations are better able to meet their sales and use tax obligations and better prepared to defend against potential audits.