Working with sales and use taxes - some problem areas.

• Author: Preston, Richard W.

State governments' ability to raise tax rates or impose new taxes for additional revenue is decreasing. At the same time, their need for additional revenue is increasing. To close this gap, states are attempting to collect unpaid tax through the audit process. One area many states have targeted is the sales and use tax.

Definitions

The terms "sales tax" and use tax" are often used in the same context but are mutually exclusive. These taxes are similar because under both the tax is assessed and paid on the purchase price of merchandise. These taxes are often known under different names in different states ("retailer's occupation tax" in Illinois; "business license tax" in California; "gross receipts tax" in Indiana). The only difference between the two taxes is who collects and remits the tax: A seller or merchant collects the sales tax from a purchaser and remits the tax to the state; a purchaser must self-assess the use tax and remit it to the state.

Transactions that may be subject to use tax include:

[ ] Items purchased from an out-of-state mail order house.

[ ] A purchase from an out-of-state seller.

[ ] An item taken out of resale inventory for personal use.

[ ] Property brought into a state for use within that state without paying out-of-state sales taxes. This can occur even if the property is in that state for only a moment. This creates exposure to the use tax in multiple states.

State audit programs typically focus on sellers. Sellers may become liable for any uncollected tax, even if the purchaser was technically required to remit it. Practically speaking, it is important to collect the tax at the time of the sale, as it is very difficult to collect the tax later from a purchaser. This makes it incumbent on practitioners to advise clients of their exposure to sales tax. If they did not know that the tax affected certain sales and thus did not collect, they may find it impossible to collect after the state audits and assesses them.

Problem areas

While the concept of sales/use tax seems simple, problems arise as to what sales or purchases are exempt within a state and when a company is deemed to be doing business within a state. If a company is deemed to have a "nexus," it then becomes liable to collect a tax from its customers in that state unless

- it can show that the purchaser is exempt from the tax;

- the purchaser gives the seller a resale certificate indicating that it is purchasing the item for resale; or

- the purchaser...