Sales and Use Taxes

[drcollie]

Recently one of our forum members got tagged by his home state to pay the sales tax on items purchased from my store (as a use tax) and now seems a good time to address this issue, as there is a lot of confusion on how sales and use taxes operate.

As a basis, let me tell you that for the most part there is no such thing as "No Sales Tax" on purchases unless you live in Delaware, New Hampshire, Oregon, Montana or Alaska. Every other state collects a Sales and Use tax. What's the difference between Sales and Use?

SALES TAX is collected by the Merchant at time of sale. The Merchant is only required to collect it in a state where they have a business presence (this is loosely defined). Obviously where a merchant has his physical location is a presence (such as my store being located in Virginia), however some states consider advertising in their states and making deliveries to that state with the company vehicles a business presence as well (in my case, I have had the State of Maryland insist I have a business presence in their state by running display advertising The Washington Post which serves VA, MD and DC).

USE TAX is what you are required to pay your home state for purchases made out-of-state when the merchant does not collect it. In most states this runs entirely on the honor system and you are required to report it annually on your state income tax. Few people ever do, other than those running for high political office or seeking a career in The Justice Department, etc. The Use Tax is the same as your state sales tax (rate), and applies to big items like furniture, and small items you get off EBAY. As you can imagine, enforcement is difficult for the states.


What determines your tax status? Quite simply, you are liable for the sales and use tax in the state where you take possession of the goods. For example, if you live in North Carolina and drive to my store in Virgina and buy a lamp, I will collect the 5% Sales Tax for VA as required by law. If you buy the same lamp in my store and ask me to ship it to you in North Carolina, I will not collect either the VA or NC tax, as you are taking possession of the goods in NC, and I have no business presence in that state. This does not mean its tax-free, it means you are liable for the Use Tax in your state.

There is no merchant that should ever tell you your purchase is 'Tax-Free' unless you live in one of the five states previously listed. Rather, they should tell you "I do not collect sales tax on your order". That means they are not acting as the agent for your state, it does not mean you do not have to pay the Use tax for the state in which you reside.

So, how does the state taxing authority find out? Quite simply, they stop trucks at weigh stations and demand to see their bills of lading. They will stop trucks that they think are hauling goods to the end consumer and examine their load and paperwork. Then they photocopy the manifests which has the items and your name and address on them and then send you the notice to pay up. This is done to enhance the revenue stream of the state and they are obviously not looking for the UPS guy bringing you CD's from Amazon.com, but going for big-ticket purchases such as furniture.

Pennsylvania is the most notorious of the states I am familiar with. They were stopping my trucks so often that we stopped using the interstates and toll roads in PA when we had customer deliveries in the state, and would only come in on secondary roads (enforcement teams are only on major highways).

Most recently, our forum member lives in Florida and was tagged for the use tax when the Home Delivery Service was stopped coming into the state on I-95. Once the state authorities have the manifests, they can see that (1) sofa, (1) Recliner and (1) loveseat are being delivered to the end consumer, but they do not know how much you paid for them. Dollar numbers are never on manifests. When they send the bill, they tell you to remit the amount based on the percentage of what you paid for the pieces, but they do not know what that would be. While you are going to pay a tax of some kind on your items at this point, they are not going to know the price paid unless you disclose it.

95% of all orders going out-of-state are never audited, but with states looking for money these days they may very well be stepping up efforts to collect Use Taxes. So keep in mind you can get a bill for that purchase you made from an out-of-state merchant if the freight trucks get audited. You are liable for the taxes, not your selling merchant.

Hopefully I've explained this well, if not - please ask questions!

[habs88]

Not that Duane needs any credibility (always has it!), i am a cpa and can say that Duane's analysis here of sales/use tax is accurate and well written.

[drcollie]

I was talking to West Express about this (blanket wrap service, White Glove) and my contact there told me that he sees PA, TN do this on an infrequent basis, but Florida is by far the worst. They are stopping many of the trucks at the I-95 Weigh Station coming into Florida, and photocopying the manifests (which show names, items to be delivered, but not prices paid).

FYI.