Academic journal article Journal of Accountancy

The Fundamentals of Sales and Use Taxes; States Are Turning to Sales and Use Taxes to Meet Growing Revenue Needs

Academic journal article Journal of Accountancy

The Fundamentals of Sales and Use Taxes; States Are Turning to Sales and Use Taxes to Meet Growing Revenue Needs

Article excerpt

For many years, sales and use taxes were the poor country cousins of the federal income tax. The taxes seemed simple enough; even the forms appeared relatively unsophisticated--no run-on sentences or allusions to obscure code sections. And if the taxpayer made a mistake, the dollar amounts were never material.

In the last decade, business exposure to sales and use taxes has exploded as a consequence of changes in technology, national marketing, purchasing and transportation pattern. Today, even small and midsized businesses find themselves exposed to increasingly confusing and complicated sales and use tax regulations.

For business owners, this means the city or state government has joined Uncle Sam as a business partner. For CPAs, it means more work, more opportunities for planning and--perhaps most important--a chance to expand into an area for which there is a growing demand. One common planning opportunity is the location of manufacturing facilities. Some states and localities offer sales tax exemption on purchases of equipment used in manufacturing.

This article reviews

* The basics of sales and use taxes.

* The transactions subject to tax.

* How the tax base is defined.

* Who pays the tax.

* Some prominent exemptions.


Sales and use taxes complement each other, but each is distinct and has its own grounding in constitutional and tax theory. Nevertheless, both are excise taxes, largely on tangible personal property and certain specified services. Briefly, sales tax is a transaction tax on some services and the exchange of personal property; use tax is a levy on the storage, use or consumption of any items that have escaped sales tax.

Here's a simple example. A company buys to filing cabinets from a local office supply store. If the cabinets cost $300 and the state sales tax rate is 3%, the total price is $309. (In all likelihood there also will be a city and perhaps a county sales tax.) However, if the company buys the same cabinets from an out-of-state supplier that does not have a location (nexus) in that company's state, the purchase likely will escape sales tax. The compoany instead will owe use tax (usually at the same rate as the sales tax) on the storage, use or consumption of the cabinets to the state in which it is located.

The theory behind this scenario is quite simple.

* States refuse to lose revenue simply because an otherwise taxable purchase was made out of state.

* In-state retailers believe a use tax creates an even playing field between them and out-of-state retailers.


In general, taxes commonly apply to exchanges of tangible personal property; specific services such as room rentals, meals, telephone and telegraph services; and sales of utility services such as gas and electricity. Usually the term "tangible personal property" is unhelpfully defined as anything other than real property. Excluding real property such as buildings and intangible property such as contracts, stocks and bonds, personal property includes almost all other tangible, movable objects, including cars, trucsk, furniture, clothes, computers, books, magazines, food, drinks, supplies and machinery and equipment.

The biggest problem is determining if a particular sale is one of tangible personal property, real property or services--or a combination. Making these distinctions can be critical for some businesses.

Building contractors. A plumbing contractor may be required to pay sales tax on all purchases of plumbing supplies when working on real property contract jobs. In many states, the contractor is deemed the final consumer of any tangible personal property used in a real property contract and thus is required to pay sales tax or accrue use tax on al purchases. When the job is completed, the tangible personal property disappears, becoming part of the real property. …

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