Thursday, June 03, 2010

Golden Rule: There is no sales tax on interstate transactions

Yeah, I said it. And I'll say it again. There is no sales tax on interstate transactions.

Note that I said interstate transactions, where the item is shipped from one state to another state.

Sales tax does apply to intrastate transactions, where the item is simply shipped from one point in the state to another point in the same state.

Since sales tax doesn't apply to interstate transactions, what tax does apply? You got it...use tax. Since use tax is a tax on the use of an item, as opposed to the transaction (like sales tax), use tax can plug the loophole where the sales tax couldn't be collected, namely interstate transactions. Heck, that's what it was invented to do!

So, when it's an interstate transaction, there's no sales tax. But there is use tax. The buyer has the responsibility of paying the use tax to the state. However, if the seller has nexus in the state, the the seller has to collect the use tax from the buyer. It'll look a lot like sales tax since the rules and rates are generally the same.

To see an illustration of why this is the case, please see this three part series. It's got pictures, maps and everything!

The Sales Tax Guy

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Here's information on our upcoming seminars and webinars.

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.


Anonymous said...

Let's say you ship furniture to me. Your store is online and in Los Angeles, CA. I live in Centennial, CO.
Which use/sales tax do you charge me, California or Colorado's?

Anonymous said...

Using a website to make sales to a state's residents can create a nexus for a seller. These states CA and CO have nexus on internet sales. The tax is to CO, assuming that the seller is taxable or has no resale certificate.

Jim Frazier said...

Nope - not unless the seller has some sort of physical presence in terms of facilities, tangible personal property or people. Just making sales off of a web site, by itself, doesn't create nexus in any state.

And the point of the article is that it's not sales tax that is due on an interstate's use tax that's due on the buyers use of the goods. And the seller will have to collect that use tax if the seller has nexus.