Sales and use tax regulations are critical for any business involved in consumer goods. These taxes govern the sale, purchase, and use of a wide range of products. Failure to fully understand their impact can lead to serious consequences. Noncompliance exposes businesses to significant risks, including hefty penalties, interest charges, and sales and use tax audits.
It is imperative to avoid the dangers of common pitfalls, such as discrepancies in point-of-sale (POS) transaction reporting and mismatches in 1099-K to bank statement reconciliations. Ignoring these details can invite difficult statistical audits, including impeachment of original records and determination of sales by mark-up techniques, putting your business at considerable financial and legal risk.
Thompson Tax’s Two Essential Rules of Engagement
- D.O.T.S. (Depends on the State) – Every state has unique tax regulations. It’s crucial to understand and comply with the specific rules in each state where you operate.
- Documentation! Documentation! Documentation! – Keep thorough records of all sales transactions. Proper documentation is essential for successfully navigating potential audits.
Sales Tax
Definition
Sales tax, charged on certain services and tangible goods, is collected by sellers at sale and submitted to the state.
Applicability to Consumer Goods
For businesses dealing with consumer goods, sales tax typically applies to:
- Retail Sales: Sales of physical goods such as clothing, electronics, furniture, and household items.
- Online Purchases: Sales made through e-commerce platforms or online stores are also subject to sales tax, depending on the seller’s and buyer’s locations.
Commonly Taxed Consumer Goods
- Clothing and Apparel: Most states tax clothing and apparel, though some may offer exemptions or reduced rates for certain items.
- Electronics: Sales of electronics such as smartphones, laptops, and televisions are generally subject to sales tax.
- Furniture: Furniture purchases are typically taxable, including items like sofas, beds, and dining tables.
- Household Goods: Products like kitchenware, bedding, and cleaning supplies are generally taxable.
Use Tax
Definition
Use tax is applied to the use, storage, or consumption of tangible personal property when sales tax has not been paid. It ensures that tax is collected on goods used in the state, even if purchased out-of-state or online.
Applicability to Consumer Goods
For businesses handling consumer goods, use tax may apply to furniture, fixtures, and equipment as well as software licenses (SaaS) and other POS-related items:
- Out-of-State Purchases: When goods are purchased from out-of-state vendors without paying sales tax, use tax is due upon bringing these items into the state.
- Online Purchases: Purchases made online from sellers who do not collect sales tax may require the buyer to pay use tax.
Taxability of Different Transactions
Retail Sales
- Physical Goods: Sales of tangible personal property such as clothing, electronics, and furniture are generally subject to sales tax.
- Digital Goods: Digital products and services are constantly changing and require additional attention in your taxability matrix.
- Services: Some states may tax services related to consumer goods, such as installation, repair, and delivery.
Online and Remote Sales
- E-Commerce Transactions: In addition to the Digital Goods described above, online sales are subject to sales tax based on the location of the seller and buyer. *Sales tax collection requirements vary by state.
- Marketplace Facilitators: Forty-six states (including DC) collect sales and use tax and have their own online marketplace rules. Online marketplaces (e.g., Amazon, eBay) may be required to collect and remit sales tax on behalf of sellers. Caution should be taken to review any marketplace agreements carefully on a state-specific basis.
Exemptions and Special Considerations
- Sales Tax Holidays: Some states offer sales tax holidays where certain items are exempt from sales tax for a limited time. Caution: You may have limited time to reprogram your POS system and determine which items (e.g., clothing, computers) are being provided the exemption.
- Resale Certificates: Businesses purchasing goods for resale can use resale certificates to avoid paying sales tax on those items.
Compliance and Record-Keeping
Importance of Accurate Records
Maintaining accurate records is crucial for compliance with sales and use tax regulations. Records should include:
- Sales invoices and receipts
- Documentation of out-of-state purchases
- Resale and exemption certificates
- Online transaction records
Audits and Penalties
Failure to comply with sales and use tax regulations can lead to audits, fines, and penalties. It is essential to regularly review your tax practices and consult with tax professionals to ensure compliance.
Additional Items to Consider
- Streamlined Sales Tax Registration (SST): Are you properly registered at both the state and local level?
- Exemptions: Where do you store your exemption and resale certificates, and have you reviewed their validity?
- Exclusions: Has the state provided you with a specific exclusion for the product or service you are not applying sales tax to?
- POS system: #1 Audit issue – Do you really know your data?
- Internet/Brick & Mortar: Are you reporting your online sales differently than your brick-and-mortar sales?
- Mark-up analysis: Auditors sometimes determine sales based on the cost of goods sold.
- Self-consumption: Do you offer any giveaways or provide employees with free items?
- Wholesaler/Retailer: Do you have current, valid resale certificates taken in good faith?
Thompson Tax Is Here to Help
Understanding and managing sales and use tax for consumer goods is vital for businesses to avoid compliance issues and potential penalties. By gaining a thorough understanding of how these taxes apply to different consumer goods and transactions, businesses can effectively manage their tax obligations and ensure compliance with state regulations. For specific guidance and advice tailored to your company’s needs, reach out to Thompson Tax today. We are just a phone call away.
FAQs on Sales and Use Tax for Consumer Goods
What is the difference between sales tax and use tax?
- Sales Tax: Collected by the seller at the point of sale on the purchase of goods and services.
- Use Tax: Applies to the purchaser on the use, storage, or consumption of goods when sales tax has not been paid, typically on out-of-state purchases.
Are all consumer goods subject to sales tax?
Generally, most tangible personal property, such as clothing, electronics, and furniture, is subject to sales tax. However, some states may exempt specific items or offer reduced rates for certain goods. Determining exemptions for consumer goods is product and state-specific (e.g., water vs. carbonated water, hot food vs. cold food, big marshmallows vs. little marshmallows).
What should I do if I overpaid sales tax?
If you have overpaid sales tax or paid tax on exempt items, you can file a Claim for Refund with the state tax authority. Documentation supporting your claim will be required.
How do I handle sales tax for mixed transactions (e.g., the sale of carpeting, including installation – TPP and a non-taxable service)?
Careful consideration should be taken when determining how to handle transactions involving taxable and non-taxable components and how to treat, map, and then report those sales. For transactions involving both taxable and non-taxable items, you should separately itemize the taxable and non-taxable portions on the invoice and apply sales tax only to the taxable portion. *Rules vary by state.
How do I handle sales tax for bundled transactions (e.g., gift baskets – the sale of multiple TPP items, some of which are exempt from sales tax)?
Careful consideration should be taken when determining how to handle transactions involving taxable and non-taxable components and how to treat, map, and then report those sales. For transactions involving both taxable and non-taxable items, you should separately itemize the taxable and non-taxable portions on the invoice and apply sales tax only to the taxable portion. *Rules vary by state.