Friday, June 27, 2014

Golden Rule of Sales and Use Taxes: The Seven Factors that Determine the Taxability of Any Sale


What state has jurisdiction?

Generally, with few exceptions, the place where the buyer, or the buyer's agent, takes physical possession or control of the goods is the state that has jurisdiction.  When it comes to services, it's a little messier.  It's usually where the services were performed but sometimes it's where the buyer receives the benefit of the services.

This the first question you have to answer.  All of the other answers depend on the delivery state.

If you're the seller, a corollary factor is whether you have nexus in the state.  If you don't, then you probably don't have to worry about the rest this article.  Yay!

Who is the buyer, or the seller?

In most states, there are exemptions for sales to non-profits and government agencies.  And there are usually more limited exemptions for sales by these types of organizations.  In addition, there are often very specific exemptions for certain organizations who have managed to gain special deals based on how wonderful the politicians think they are.

By the way, you'll usually need exemption certificates for this factor.

How will the purchase be used?

There are exemptions for organizations using the purchase for manufacturing, agriculture, research and development, etc.  Or the buyer may not use it at all, which means it's being bought for resale.  

By the way, you'll usually need exemption certificates for this factor as well.

Where will the purchase be used?

Many states establish geographic areas within the state (I generically call them enterprise zones) where there are loads of exemptions.  In addition, there are variations within a state, based on local jurisdiction rules.  I don't even want to go there.  I'm looking at you, Colorado.

When will the purchase be used

Many states have sales tax holidays for things like clothing, school supplies, guns, energy saving appliances and hurricane supplies.  These holidays are usually only for a limited amount of time - a weekend in most cases.  Then you also have to keep in mind that politicians change their minds.  Or want to limit the amount of the damage they do.  So there are always effective dates when new laws go into effect.  And there are often sunset dates on laws, particularly exemptions.

What is the type of the sale?

Is it a rental or long term lease?  Is it a simple sale or installment sale?  Is it a gift?  Or perhaps it's an occasional sale?  And if it's an occasional sale, is it a business that's selling or buying?

What is being sold?

Finally, there are exemptions for things based solely on what the purchase is.  Is it food or drugs?  In a few states, clothing is exempt.  Maybe it's an intangible.  And of course, just about any service you can name is taxable somewhere.

The Sales Tax Guy

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