Sales and Use Taxes Text Size:

Small businesses offer goods and services which are subject to sales tax in many states. Goods and services which are sold in other states and are used in the taxing state may be subject to use taxes. Sales and use taxes are usually enacted together, and the rates are the same. These taxes apply to leases of tangible personal property in some states. In running your small business knowing which taxes your are responsible for collecting and how to pay those taxes to the right government authority is a must.

Retail Sales Taxes

Retail sales taxes are imposed generally on the sale of tangible personal property. Tangible personal property is personal property that can be seen, weighed, measured or touched or that is perceptible to the senses in any other manner, like clothing or cars. State laws require the consumer to pay the sales tax, and they require the vendor to collect the tax in addition to the sales price and remit the tax to the state. In some states, the sales tax is also imposed on services, rentals of property, and admission to theaters or amusement parks; in other states, there are separate taxes for these activities; some states have no such tax.

Not all tangible property sold is subject to taxation, however; state laws exempt many items from sales tax. Tax-exempt items include:

• Food (not convenience or pre-prepared foods)
• Drugs
• Medicines
• Other items used for health reasons, such as crutches or eyeglasses
• Items such as newspapers deemed to be in the public interest

Items that are sold to manufacturers, such as equipment to be used in processing goods that will eventually be sold to consumers, are often exempt, since to tax them might lead to double taxation.

Use Taxes

Use taxes are imposed on the storage, use or other consumption within the taxing state of tangible personal property purchased outside the taxing state. The purpose of the tax is to complement the sales tax, so that purchases outside the state of imposition are not avoided.

A major problem with use taxes is their collection: it is virtually impossible to track down the consumers who buy a product in one state but have it sent to, or use it in, another state. Therefore, if a company does or solicits sufficient business in a state, it may be required to collect and submit use taxes to the state in which the sales are made.

Sales and Use Taxes

Sales and use taxes are generally enacted together, and the rates are the same so as to avoid discriminatory taxation of interstate commerce. Goods and services exempt from the sales tax are generally exempt from the use tax as well. The use tax is generally not imposed on items that happen to be in the state, when the actual ''sale'' or ''use'' occurs elsewhere.

Taxes on Personal Property Leases

Under some state laws, general sales and use taxes apply to leases and rentals of tangible personal property. A sale or purchase includes the exchange, barter, lease or rental of tangible personal property for something of value. A seller or retailer includes any lessor engaged in the business of leasing personal property that is subject to a sales or use tax. Thus, a sales tax is imposed on every personal property lease transaction unless the transaction is exempted.

The tax must be paid by the lessee, who is the person who rents the property from the lessor. The lessor is required to add the sales or use tax to the amount of the lease payments, and it becomes part of the rental payment. When payment is made, the lessor must remit the tax to the state.

Some property may be exempt from these taxes, including:

• Tangible personal property that is leased or purchased for the sole purpose of leasing or renting to another person
• Transfers of common interests in tangible personal property among the owners, if the sales or use tax has already been paid
• Certain leases of motor vehicles that are taxed under a specific motor vehicle tax
• Leases to federal, state or local governments
• Leases or rentals to certain nonprofit organizations
• Leases of machinery and equipment exclusively used in the production of food

If you have any questions about sales or use taxes for your business, contact a small business lawyer in your area.

Questions for Your Attorney

• How often does a business have to remit sales taxes to the state? Does the frequency vary depending on the amount of tax to be remitted?
• If my business sells a lot of goods in a neighboring state, should I check into the issue of use taxes or should I wait to hear from my state government first?
• Which governmental agency is responsible for collecting sales and use taxes?

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