You are probably familiar with the term sales tax. After all, most states impose a sales tax on the goods consumers purchase every day. Use tax is a little less known, but still important to understand, especially if you are in the business of selling goods online. E-commerce businesses may be subject to both sales and use tax, so it is important to make sure you understand the difference between sales and use tax and how to properly calculate, collect, and remit both.
The Difference Between Sales and Use Tax
Sales and use tax are both levied on goods sold. There are only 5 states in the US that do not currently charge a sales tax including: Alaska, Delaware, Montana, New Hampshire, and Oregon. It is important to note that while these states do not levy a statewide sales tax, they do allow localities to levy local taxes, and many jurisdictions do.
- Sales tax is a tax levied by the state on goods sold within the state to local residents. In addition to the state sales tax, many localities impose an additional sales tax. For example; in California the state sales tax is 7.25%, however the city of Los Angeles imposes an additional 2.25% for a total of 9.5%. Sales tax typically pays for state and local budget items like roads and city services.
- Use tax is similar to sales tax in that it is a tax levied on goods, however its implementation is a little different. Use tax applies to goods that are purchased out of state where no sales tax was collected. For example; if you live in California and decide to purchase goods in Oregon where no sales tax was imposed, and intend to consume or store the product in California, then a use tax would be imposed. Use tax equals the same rates as the state sales tax.
Who Has to Pay Sales and Use Tax?
When understanding the difference between sales and use tax it is important to understand how each state imposes sales tax. Some states are Seller Privilege Tax States and some are Consumer Tax States.
- In Seller Privilege Tax States, the seller is responsible for the sales tax. This means the seller must pay the sales tax regardless of if it is collected from the buyer or not. It is generally imposed on the privilege of doing business in the state. Since, the tax is not required to be passed onto the buyer, it is not required to be listed separately on the invoice. In the event of an audit, the state may only collect tax from the seller.
- In Consumer Tax States, the sales tax is levied on the buyer with it being the responsibility of the seller to collect it. The seller is still required to remit sales tax, even if it is not collected from the buyer. It is generally imposed on the privilege of using or consuming the goods purchased within the state. In the event of an audit, the state may collect tax from either the seller or the buyer. Most states are set up as Consumer Tax States.
As you can see, both buyers and sellers are responsible for paying sales tax depending on how your state is structured. As an online seller, it is important to know how each state and locality you conduct business in handles sales and use tax. Since state and local taxes vary, working with a SALT (state and local tax) specialist is a smart choice.
Tips for Calculating and Remitting Sales and Use Tax
Sales and use tax rates can vary from state to state and locality to locality, so one of the most important tips we can offer to online sellers is to know where you have Nexus. Nexus can be defined as having a physical or economic presence in a state or locality. This could be having an office location, inventory location, an affiliate or employee location, or having a significant amount of sales in a particular location. In addition to knowing where you have Nexus, it is important to know if you live in an origin based sales tax state or a destination based sales tax state.
- Origin based sales tax states allow sellers to charge the effective sales tax rate in the location where their business is based.
- Destination based sales tax states require the sales tax to be calculated based on where the buyer is located.
California is a mix of both, with city, county, and state taxes being origin based, and district sales taxes destination based. Most online selling platforms help you calculated the amount of sales tax that needs to be collected, however as a seller you are still responsible for collecting, and remitting accurate sales tax. Having a good accounting process can help you keep track of where you have Nexus. We suggest using either Quickbooks or Xero for you accounting processes, as both can help with calculating and remitting sales tax accurately. In addition, enlisting the guidance of a SALT specialist is also a good idea, especially as you scale your business. The more business you do, the more locations you have Nexus, the more complicated your tax situation will be. Learn more about state and local taxes by contacting one of the tax and accounting experts at Tax Hack today! To learn more about the difference between sales and use tax subscribe to our newsletter.