United States Sales Tax and Use Tax
November 28, 2023
What is the tax called?
Sales and Use Tax
What is the tax authority?
Each state and many local jurisdictions have authority to impose a sales and use tax, subject to U.S. constitutional restrictions.
What type of tax is it?
Consumption based tax on the final consumers of taxable goods and services. Entities generally collect the tax from the customer and remit the amounts to the state.
What is it due on?
Retail transactions of tangible personal property, enumerated services, and certain digital goods.
What are the sales and use tax rates?
There is no national sales tax therefore there is no standard rate.
Rates vary state to state. Most states allow local jurisdictions, such as cities, counties, and districts, to impose sales tax in addition to the state tax.
Are there exemptions for sales tax?
Many states offer reduced rates or exemptions for certain types of goods and services, such as clothing, food, or personal hygiene items. However, each state varies.
Retailers and manufacturers are allowed to provide resale certificates to their wholesale dealers or suppliers to purchase goods without having to pay sales tax on the transaction.
What does a sales tax number look like?
Varies by state.
When does an entity need to register for a sales tax permit?
If the entity is engaged in the business of selling tangible personal property at retail or taxable services, the entity should register once they have established nexus in the state. Each state has its own standards of what constitutes nexus.
What is nexus and how is it established?
Nexus is a level of connection between an entity and a taxing jurisdiction. Until an entity has nexus, the taxing authority cannot impose sales tax on that entity.
Nexus can be established by the entity having a physical presence or an economic presence in the state. Each state has put into place economic thresholds, such as sales volume or number of transactions. Once those thresholds are exceeded, or physical presence,exists, the entity will have substantial nexus in the state and will be required to collect and remit sales tax.
Are there any special rules?
States also have marketplace facilitator laws where online marketplaces are required to collect and remit sales tax on behalf of third-party sellers. However, each state has its own definition of what constitutes a marketplace facilitator, therefore, online sellers should verify that tax is being collected on their behalf.
Does a foreign entity need a fiscal representative?
Some states require foreign registrants to have a registered agent in the state to receive official notices or correspondence.
How often do sales and use returns need to be submitted?
Depending on the state, returns must be filed either annually, semi-annually, quarterly, monthly, or semi-monthly. Sales volume or the amount of tax due typically determines an entity’s filing frequency.
Are penalties imposed for late filing and payment?
States will assess penalties for the late filing of the return and the late payment of tax. Generally, most states assess a penalty up to 25% of the tax due. However, some states will assess taxes up to 39%. The state will also assess interest on the underpayment of tax.
Is there a way to get penalty relief if an entity failed to timely file a return?
Yes – States offer voluntary disclosure agreements for entities to come forward to pay its tax obligation in exchange for penalty waivers and limiting the lookback periods. Additionally, penalties can be waived if there is reasonable cause for the late filing.
Global Technical Director, Kreston VDN
Sales Tax is similar to VAT/GST in that it is also charged on supplies of goods and services, but it is a consumption-based tax, charged on the sale to the end consumer rather than throughout the supply chain.