Sales Tax and Use Tax
February 22, 2022
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. It applies in the United States (“US”) for example, but not in every state. There are approximately 45 states that impose a sales tax. States, along with local jurisdictions, have the power to decide on local taxation and applicable rates; hence, there are a huge number of variations in the way Sales Tax applies depending on the specific location of the sale, the type of product or service being sold, the terms of the sale, and various other factors.
Whether a business is located in the US or overseas, another issue for companies to consider is nexus. Nexus, or the connections one has with the state, is what gives the state the ability to impose sales tax collection requirements on a company or business. Since each state in the US legislates and administers its own rules, each state has to be evaluated independently from the others in determining whether sales tax collection requirements exist. This nexus evaluation on a state by state basis can be fairly complex since each state’s provisions are very different. The use of a Kreston indirect tax expert can make this complicated nexus exercise more simplistic.
As a complement to Sales Tax, a separate tax, called a “Use Tax” can be due by a company who consumes items (that are not resold) when Sales Tax was not charged by the vendor. Companies unfamiliar with this area of taxation should consider consulting with a Kreston sales and use tax specialist to determine whether specific products or services are subject to use tax, the appropriate rate to be applied, and the applicable jurisdiction to which the use tax should be remitted.
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