(as published in Stone
of sales tax:
Questions and Answers
question of whether to pay sales tax or use tax is one
of the most commonly asked questions when it comes to
the purchase of supplies and materials used in the stone
fabrication and stone restoration industry.
To start with, it is useful to identify the basic government
definitions of sales and use tax.
Sales tax is imposed on a transfer of title and/or
possession of tangible personal property and various
services. Sales tax is measured by the sales price paid
or the gross receipts received from the transfer of
taxable property or services. Historically, this tax
has been known as a "transaction tax," as
the tax was imposed on specific transactions involving
a sale of tangible personal property. Furthermore, services
that are a part of a taxable sale of tangible personal
property are also generally subject to sales tax.
Use tax complements the sales tax and is typically
assessed on purchases made out of state and brought
into a jurisdiction for use, storage or consumption.
The same property or services subject to sales tax (if
purchased from an in-state vendor) are subject to use
tax when purchased from an out-of-state vendor and brought
or shipped by the seller or the purchaser into the state
Generally, only one of the taxes can be assessed on
a transaction; not both. The measure of the use tax,
as in the sales tax, is the "purchase price"
or the "sales price" of the goods to the consumer.
The "purchase price" is generally the value,
in terms of money, at which a seller transfers property
or services to a buyer. With the political interpretations
of various state and government agencies presented,
the real measure is how these terms affect firms in
An example can be found in a flooring contractor who
is planning to install a new tile floor for one of its
clients. He is on the Internet one night, and sees a
web site that sells all of the usual tools, materials
or adhesives which are needed to perform the current
contract. He notes that he can save 3 to 8.5% in sales
tax by buying these materials from an out-of-state vendor,
which would amount to as much as $825 in sales tax savings
on a $10,000 purchase in New York City. The contractor
orders the materials with his credit card, and he is
happy because he thinks he may have just saved $825.
Unfortunately, the reality is that all he did was take
the fiduciary responsibility of collecting the sales
tax away from the out-of-state vendor, and may have
put the responsibility on himself as the purchaser.
He just incurred a "use tax liability."
The bottom line is that consumers may not save as much
buying on the Internet -- or from a catalog -- as they
might think. This is particularly true if the consumer
counts on the absence of tax as part of the savings.
One defense mechanism by these consumers may be to ask,
"What are the chances of being audited by my state's
sales tax department?" Recently, one of my clients
received a notification from the California sales tax
office. They requested to see the firm's sales invoices,
and they also requested copies of resale and tax-exempt
certificates, which my client receives from its customers.
The sales tax board was looking to see if the company
was charging sales tax to its customers. If they saw
an invoice to a customer with no sales tax charged,
they then requested to see a copy of either a resale
certificate or tax-exempt certificate from that customer.
The final outcome was that my client had no sales or
use tax liability. It turns out that the auditor was
making a list of some of the customers who submitted
resale or tax-exempt certificates. The auditor was going
to use those certificates to see if the customers were
filing sales tax returns and paying sales or use tax
to the State of California. In some circumstances, these
were out of state, which meant their sales tax liability
was not to California, but to their home state. In other
circumstances, the auditor may use the information found
to pursue other sales tax audits within California.
As it turns out, this is just one of the many ways a
company can get caught for failure to comply with sales
and use tax.
Sales and use tax constitute a major revenue source
for most of the states that impose the tax. Currently,
the following states do not impose a retail sales tax:
Oregon, Delaware, Alaska, Montana and New Hampshire.
Tax compliance can save you many headaches as well as
penalties and interest. One of the primary ways to stay
in compliance is to make sure you file monthly, quarterly
or annual sales tax returns with your state. If nothing
else, this will get the statue of limitations running.
Generally, the statue of limitations is three years
back. Meaning, if you have filed sales tax returns all
along, the furthest back the audit period can be (if
it began today) is 1998. If you have never filed sales
tax returns, there is no statue of limitations. Therefore
the sales tax audit can include the first day you began
doing business, even if that is back in 1991.
It is not necessary to assume that all vendors will
get audited, but firms should take proper precaution
to assure that if they are audited, it will turn out
to be only an inconvenience, and not a devastating hit
to the cash flow.
Although it is not feasible to list all products and
services which may be subject to sales or use tax, the
purchaser needs to make himself familiar with the sales
tax laws of his home state. In some circumstances, a
business can perform different projects which all may
have different sales tax consequences. Firms should
get in the habit of questioning themselves as to the
sales and use tax ramifications of all contracts they
a Certified Public Accountant in New York State, I am
always updating my clients as to potential situations
which could have an impact on the way a client does
business. A company should never hesitate to call its
local accountant or use the Internet to answer any questions
it may have.
If your business publication would like an article
concerning taxes in your industry, please contact scott
by email at email@example.com