State & Local Sales Tax is a consumption tax imposed by a taxing authority on the sale of goods and/or services. Sales Tax is crucial for US businesses as all states except five levy a Sales Tax.
There are two questions commonly asked regarding Sales Tax where a lot of ambiguity and “it depends” answers tend to follow:
- Should I be charging, collecting, and remitting Sales Tax?
- Should I be paying Sales Tax to my vendors?
The second question will be the focus of this article as the errors made in paying undue Sales Tax are so overwhelmingly prevalent and costly across the Nation that entire State & Local Tax consulting practices are built around addressing this question. This is due to the gray areas that exist within individual state regulation and lack of conformity and consistency in that regulation across states. This makes trying to determine what item and/or service is taxable vs. not-taxable very difficult for multi-state businesses. Taxable determinations can be determined by how an item or service is used, who uses the item or service, and where the item or service is used.
The Use of Items
The use of purchased items can often determine whether those items are subject to Sales Tax or not. For example, in the state of Massachusetts, materials, tools, or fuel consumed and used directly or exclusively in research and development by a manufacturer or research and development corporation is exempt from Sales Tax. However, if those same items were used outside of those exempt activities, they would be subject to Sales Tax. These Use-based exemptions vary by state and can change with time. As these exemptions are often used to encourage economic development by targeted entities determined at the discretion of the local taxing authority.
Taxable vs. Non-Taxable Services
In general, most services are not subject to Sales Tax, however, this vastly differs by state. For example, in Texas, routine maintenance on real property is typically exempt from Sales Tax, but real property repair and remodeling of nonresidential property is not exempt. New York, on the other hand levies a Sales Tax against repair, maintenance, and installation services provided to residential AND non-residential customers alike.
Sales Tax Exemptions
Taxing authorities can exempt certain activities or entities from Sales Tax based on their nature, structure, or end-consumer.
Activity Based Exemptions
- The intended use of items can determine their exemption status. Most states have a Sales Tax exemption for materials, tools, and equipment used directly in the manufacturing of goods for sale. It’s often a focal point for manufacturers to get as many purchases covered under the umbrella of this exemption as possible.
Entity Based Exemptions
- Your business may receive entity-level exemptions based on its operational purpose. Exempt entities vary for each state, but often include:
- Nonprofit organizations
- Religious or educational affiliations
- Federal, state, and local government
- Specific industries
- Manufacturers
Purchases for Resale
- When a business buys products for reselling, it doesn’t qualify as the end consumer. Instead, the business is acting as an intermediary. They are buying the items from a supplier or manufacturer, and selling them to customers. Typically, businesses apply Sales Tax to the final sale of goods to the end consumer. The business can provide a resale certificate to exempt itself from paying Sales Tax during the purchasing process.
What is a Reverse Sales & Use Tax Audit (also known as a Refund Review)?
A Reverse Sales & Use Tax Audit determines if Sales Tax has been overpaid and/or paid in error. Sales Tax errors are common and can be costly to a business, especially when compounded over time. At Leyton, our experienced Sales Tax consultants can conduct a review of a business’s past purchasing activity to (1) identify if any errors have occurred, (2) rectify those errors by filing for refunds with the appropriate taxing authority, and (3) conduct ongoing maintenance to ensure no future errors take place.
