These laws may be imposed directly on a non-US seller or indirectly by requiring the non-US seller to collect taxes from a purchaser in the US. These levies represent asignificant revenue source for state and local governments, and accordingly, can represent a significant cost of doing business in the US.Forty-five states and the District of Columbia impose sales and use taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon do not. Thousands of local governmentsalso impose sales and use taxes. These include counties, cities, municipalities, parishes, and school districts. While significant differences exist among the various jurisdictions,most localities impose taxes on the same items taxed by the state.This article provides general answers to five sales and use tax
questions that may be asked by non-US companies doing business in the US. Because laws vary from jurisdictionto jurisdiction, a company should review the laws in each state in which it does business to determine its specific sales and use tax obligations.1. How is sales tax imposed?A sales tax generally is levied on gross consideration paid on retail sales, transfers, or rentals of tangible personal property and selected services in the state. A sale for sales taxpurposes is not the same as a "sale" under US commercial law. For example, a lease is subject to sales tax in most states, but a lease is not a commercial sale because onlypossession has transferred, not title. Sales taxes are usually collected by the seller, then remitted to the state, which in turn distributes the taxes to the proper locality. If theseller fails to collect tax, the seller may be liable for the taxes due plus penalties. If the seller is not required to collect tax on the sale, the purchaser may be required to remit usetaxes directly to the state.Most states tax all sales of tangible personal property unless a specific exemption exists. Conversely, sales of services and intangibles generally are subject to tax only if thestatute specifically states they are subject to tax. For example a state may impose sales tax on certain enumerated services, including data processing, advertising, employmentagency services, many repair services, and certain consulting services.2. When is a seller required to collect sales and use taxes?A seller may be required to collect sales and use taxes only if it has a physical presence in the taxing jurisdiction. A business may establish a physical presence by establishingan office or other place of business in the state, by owning property in the state, or by sending employees or representatives into the state to conduct business.While the physical presence test is often referred to as a "bright-line" test, identifying whether a physical presence has been established may not be readily apparent. Forinstance, determining whether a non-US business has physical presence in a specific state is relatively straightforward when the seller has a retail location or inventory in thestate. By contrast, whether a traveling employee or representative creates a physical presence for the seller in a particular state often requires a careful analysis. States mayprovide a de minimis exception that allows an employee or representative to attend a convention or a trade show without establishing nexus for the seller.States’ standard for what contacts may be de minimis vary. For example, a Toronto-based seller may be required to collect New York sales and use taxes if the companyregularly sends sales representatives to the state. However, the Toroto-based seller may not be required to collect Indiana sales tax when its employee sales representativetravels to the state on several occaisions. Thus, sellers with traveling employees can avoid unknowningly establishing nexus if they give careful consideration to personneltravel and the differences in each state.Similar to the assertion that a business may establish nexus through the activities of an employee, nexus may be established by the activities of an independent contractor.These assertions often are based on the common law theory of agency or the theory that the activities performed in the state on behalf of the company are significantlyassociated with its ability to establish and maintain a market in the state for its sales.Nexus may also be established by an affiliated entity. Such a concept is commonly referred to as "affiliate nexus". For example, the state law may provide that nexus isestablished for an out-of-state entity when it has an in-state affiliate that: (1) acts as a distribution facility; (2) performs services in connection to the out-of-state entity’s salesand is a member of its combined reporting group; or (3) sells similar products or has a similar name or trademarks.Perhaps the most widely publicised extension of attributional nexus is the so-called "click-through" nexus laws. Such laws may presume that an out-of-state seller, including anon-US seller, has a physical presence through a person or entity in the state with which the seller has entered into an agreement for consideration through an internet site.The click-through nexus laws are a noteworthy example of a state legislature defining nexus broadly. Further, although historically it was possible to avoid nexus by showingthat the in-state independent contractor or affiliate is separate, independent, and acting on its own behalf, some courts have upheld challenges to these laws.3. What is a use tax?A use tax is a transactional tax imposed on the use, storage, or consumption of tangible personal property and taxable services in a state. The use tax generally is applied whena sales tax was not paid previously in the taxing state and is designed to equalise tax burdens imposed on in-state and out-of-state purchases. For this reason, the use tax base,exemptions, and rates generally parallel the sales tax. Without a use tax, an in-state consumer would have an incentive to purchase goods outside of the state to avoid the homestate’s sales tax.Because the use tax is intended to prevent out-of-state purchased goods from escaping taxation, state use tax imposition statutes define the terms "use," "storage," and"consumption" quite broadly. For example, California defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership of thatproperty." It defines "storage" as "any keeping or retention . . . for any purpose except sale in the regular course of business or subsequent use solely outside [California]."Although states define these terms broadly, the use tax is not all encompassing. First, many states limit the use tax to goods purchased for use in this state—requiring an intentto use the goods within the state at the time of purchase. Second, states may provide an exemption from use tax for tangible personal property purchased outside the taxingstate and subsequently brought into the state if the first use of the property occurred outside the taxing state. For example, a computer purchased in Canada and immediatelytransferred to a company’s Richmond office will be subject to Virginia use taxes. However, if the computer were used by the purchaser in Canada for at least six months beforebeing transferred to Richmond, the property will not be subject to Virginia use taxes. Some states impose use tax even though the goods were first used outside the state, butallow a credit for sales taxes previously paid to another state.4. Where does a taxable sale occur (to what jurisdiction will the tax be due)?
Sales tax usually is imposed at the place of delivery, determined without regard to the where title transfers in the terms of a shipping contract. Sales generally are subject to tax at the place of delivery even if the purchaser immediately transports the goods outside the taxing state. In many states, goods are considered to be delivered in the seller’s state if the goods are delivered to an agent of the purchaser. Accordingly, a Vancouver purchaser that contracts with an agent to pick up goods at the manufacturer’s facility in San Francisco will be subject to California sales tax. In contrast, delivery may not be considered to have occurred in the state if the goods are delivered to a common carrier, regardless of whether the carrier is the agent of the seller, and the common carrier delivers the goods to the purchaser in Vancouver. A state may provide an exemption from sales and use tax for goods received in the state if those goods remain in transit to a point outside the state. For example, a non-US seller may not be required to collect Minnesota sales and use tax when it is brought into the state by a for-hire carrier, kept in a public warehouse for the purpose of being transported out of state, and after storage, it is used solely outside of Minnesota. Taxable services are generally sourced to the location at which the service is received. Receipt of a taxable service generally means making "first use" of the service. The first use of the service may also be where the purchaser regains possession of the tangible personal property on which the seller performed the service. For example, if an Iowa resident sends a specialty machine for repair in Michigan, then it is returned to the seller in Iowa, Iowa use tax applies where the purchaser regains possession of the tangible personal property. A few states deviate from the general "destination" rule for sourcing services. For example, only services performed within the state of Louisiana are subject to sales and use tax in that state. States may not provide credit for sales tax paid on services to another state. Thus, a problem of double taxation may arise when a taxable service is provided in a state that sources services where performed on tangible personal property to be delivered to a customer in a state where that service is also taxable but sources services under the general destination rule. In this scenario, a state may not offer a credit for sales tax imposed on taxable services that is paid to another state.
5. What is the tax base on which these taxes are imposed? The sales tax is measured by the gross sales price of the tangible personal property or services. Sales price definition varies by state, but is generally defined as "the total amount of consideration . . . for which personal property or services are sold, leased, or rented." As a practical matter, the consideration does not necessarily have to be in the form of cash or other property. For example, an assumption of liabilities in conjunction with the transfer of assets in a corporate transaction commonly represents taxable consideration in California. Finance, interest, or carrying charges may be excluded from the tax base. Likewise, most states exclude transportation charges. However, some states require charges such as finance and transportation charges to be separately stated to be excluded from the tax base. Other commonly allowed deductions include trade-ins, discounts, coupons, rebates, and returns and allowances.
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