Sales Tax Glossary
Accounting period refers to a specific time span that reflects all of the financial activity that occurred during that period. Accounting periods vary, although most are three months or twelve months. However, the biggest variations occur with start and end dates, meaning not all companies begin their fiscal year in January, nor do all final quarters end in December.
Administrative authority is the government or nongovernment agency designated to interpret, apply, and collect taxes imposed by the legislative authority. It is the taxpayer's obligation to register with, report to, and respond to requests for information and audits by the government agency responsible to administer the tax.
Affiliate nexus is the connection to a state created by a nonemployee working to expand a company's market share within that state. Typically, this work is in online affiliate marketing whereby an individual not legally associated with a business drives leads to that business in exchange for monetary compensation.
Amended Tax Return
Amended tax return means a return that is formally altered, modified, or updated by the taxpayer. Typically, this involves completing a defined amendment process either online or on paper and submitting to the appropriate taxing authority. In life (and taxes), everyone makes mistakes. Taxing jurisdictions recognize this and offer the ability to amend a tax return as a fair and safe vehicle for correcting such errors. However, in most cases, an amended return for an underpayment means the taxpayer must include interest for the outstanding balance.
Assessment means a determination of taxes calculated by an administrative authority and due by the taxpayer. An assessment usually results from an audit, or a determination of underpayment or late payment, and typically includes penalties and interest. Also referred to as a "tax assessment".
Back tax can mean (1) a tax reimbursement that was not billed or collected from the taxpayer's customer or (2) an unremitted or unreported tax due by the taxpayer.
Backfiling taxes means to prepare and file sales and use tax returns for prior periods. This can include returns "in arrears" (those that have never been filed) or "amended returns." The backfiling process typically includes the preparation of the tax return, filing with the taxing authority, and funding of any incremental tax liability due. Back filing, by its nature, implies the tax return was not filed timely and, therefore, potential penalties and interest for underpayments are always a consideration. Some common reasons for backfiling taxes include:
- delays in the initial tax reporting process where the customer is filing its "first return" in the jurisdiction;
- to correct a previously filed return that was inaccurate or incomplete; and
- to amend a return for a post-period event (for example, where a transaction was originally reported as "taxable" but the customer subsequently provided a resale certificate.)
Bad debt is a credit on a tax return due to the failure of the seller's customer to pay an invoice and the resulting tax owed.
For sales and use tax purposes, if the seller reported and paid the original sales tax and failed to collect tax reimbursement (in whole or in part) from their customer, then the seller may obtain a credit or refund of the unreimbursed tax in many jurisdictions. Often this is accomplished through a credit taken on the tax return when the bad debt is realized (for example, recorded for accounting and income tax purposes); sometimes it requires the filing of a formal claim for refund by the seller. Not all jurisdictions or types of tax allow a credit or reduction in tax due as a result of bad debt.
A bundled (or mixed) transaction is a sale of a group of goods sold as a single item. A simple example is a gift basket containing both food, which is commonly exempt from tax, and tangible personal property (TPP), which is commonly taxed.
There are many types of bundled transactions, but the most common in sales tax law are gift baskets. The challenge therefore becomes determining the tax base for such a bundled transaction. Gift baskets commonly mix food, food ingredients, and TPP and therefore, depending on the product mix, can be argued to be primarily food or TPP.
Business and Occupation Tax (B&O Tax)
A business and occupation tax (B&O tax) is specific to the United States, specifically in Washington, West Virginia, and Ohio. B&O tax is a gross receipts tax and is typically levied for the privilege of doing business in a jurisdiction, and thus is a liability of the business and not the customer (in contrast to a sales tax, which is typically the liability of the customer).
B&O taxes are typically levied against the gross revenues of the business, with specific defined allowed deductions (ways to reduce reported revenues for certain types of expenses and costs) or exemptions (kinds of revenue that are exempt from the tax). In Washington State, the B&O tax is an excise tax levied on sellers and service providers on a transactional basis. Washington justifies such a tax due to the lack of state income taxes. Unlike the state sales tax, the Washington B&O tax is unrecoverable, meaning the seller cannot separately state reimbursement for the tax from its customer.
A B&O tax may be levied by local governments as well as at the state level. Ohio recently enacted the B&O tax to replace its income tax.
A business license is a permit issued by governmental agency that allow companies to conduct business within the government's geographical jurisdiction.
A cascade (or cascading) tax is a turnover tax applied at every stage of the production process, which can lead to higher final tax revenue than a single-stage tax. These taxes have also been referred to as cumulative multistate tax or gross tax. In Europe and many other locations, cascade taxes have been replaced by a value added tax (VAT).
A cash discount is an incentive that a seller offers to a buyer in return for paying a bill owed before its due date. The seller will usually reduce the amount owed by the buyer by a small percentage or a set dollar amount as an incentive to pay the bill earlier. In general, retailer coupons are treated like a price reduction, so tax is applied on the "net" amount and if it is a manufacturer coupon, they can sometimes be treated like cash and tax is applied to the price amount before the coupon is taken.
A casual sale is a sale of tangible personal property by a person not engaged in the business of selling such tangible personal property. Most casual sales are subject to a threshold and are exempt from sales tax. Sometimes called an occasional sales exemption, most states have set a threshold of three of more separate sales in a twelve-month period as the basis for which a seller might be required to comply with the state's sales and use tax regulations.
Certified Service Provider
Certified service provider (CSP) is a outsourced tax determination and compliance service paid for by state offered through business. CSP are certified by the Streamlined Sales Tax Project. A CSP allows a business to nearly outsource its sales tax administration function. Avalara has been designated as a CSP and is under contract with the Streamlined Sales Tax Governing Board.
The commerce clause, as outlined in Article 1, Section 8, Clause 3, of the Constitution, empowers Congress "to regulate Commerce with foreign Nations, and among several States, and with the Indian Tribes." The term commerce as used in the Constitution means business or commercial exchanges in any and all of its forms between citizens of different states, including purely social communications between citizens of different states by telegraph, telephone, or radio, and the mere passage of persons from one state to another for either business or pleasure.
Commercial Activity Tax
The commercial activity tax (CAT) is an annual tax imposed for the privilege of doing business in the state of Ohio. The tax was implemented to replace Ohio's tangible personal property tax and corporate franchise tax for the majority of business in Ohio. Businesses that qualify for CAT are required to register within thirty (30) days of becoming subject to the tax. This can be accomplished by completing a Commercial Activity Tax Registration form (Form CAT-1) and submitting to the following address: Ohio Department of Taxation, P.O. Box 16158, Columbus, OH 43216-6158 Criteria that qualify a business for CAT include:
- Businesses having $500,000 or more in taxable gross receipts in Ohio;
- Businesses having $50,000 or more in property in Ohio;
- Businesses having $50,000 or more in payroll for work in Ohio;
- Businesses having at least 25% of their total property, payroll or gross receipts in Ohio; or
- Businesses domiciled in Ohio
Communications Sales Tax
The communications sales tax (also known as communications tax or communications sales & use tax) is a tax imposed on the charge for or sale of communications services. Rates vary by location and taxes are typically collected from consumers by their service providers and remitted to the appropriate tax jurisdiction. In situations where no tax is collected from the consumer by the seller, it is up to the consumer to file and pay a communications use tax. Some examples of taxable communications services include landline and wireless telephone services, pager services, 800-number services, cable television, and satellite radio services.
Compliance means simply fulfilling the collection and reporting requirements levied by governmental agencies that administer a tax. Tax compliance begins with the requirements of the business, automation of the tax collection and reporting process, and ensuring proper controls are in place to ensure the right amount of taxes are collected and records are retained.
Conditional sale means, typically, a type of lease that has a nominal sales price at the end. The significance of a conditional sale is the tax is typically due when the asset is leased or transferred.
An arrangement whereby goods are left in the possession of another party (the consignor) to sell. Typically, the consignor receives a percentage of the sale.
A consumption tax is a tax on spending on goods and services. Consumption taxes are usually indirect taxes based on the amount of money spent on consumption. Examples of consumption taxes include sales tax, value added tax (VAT), and excise tax. Consumption taxes have led to major historic events around the world. In the United States, the Stamp tax, the tax on tea, and whisky taxes are well known examples. While in India, Ghandi's Salt Satyagraha was instigated by an excise tax on salt.
Credits is defined as an amount that may be used to directly reduce a taxpayer's tax liability. A credit is different than a deduction. Credits typically apply directly to the tax liability, while a deduction reduces the amount of income or receipts that is used to calculate the tax.
Also known as a tariff, customs is a tax levied on imports (and, sometimes, on exports) by the customs authorities of a country to raise revenue, and/or to protect domestic industries from more efficient or predatory competitors abroad. Customs are typically based on the value of goods and less commonly based on weight and measures.
A deduction is an expense that a taxpayer may use to reduce the amount of income or gross receipts subject to tax.
Destination situsing (also commonly referred to as the "ship to location") refers to sales that are taxed based on the location where the purchaser receives the item. Most transaction taxes are sitused at the destination, especially when transactions cross jurisdictional borders.
Dormant Commerce Clause
The "dormant commerce clause" or "negative commerce clause" is inferred from the Commerce Clause. The Commerce Clause is a grant of power to Congress to regulate commerce between the states. Courts have inferred a corollary to that grant of power, determining that the grant of power creates an implied restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce—the negative converse of the Commerce Clause. The states are prohibited from passing their own laws that would discriminate or burden interstate commerce activities. There is no clause in the Constitution making this statement; only an inference that such a provision is understood to exist.
Drop shipment refers to a supply chain management technique in which the seller does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler who then ships the goods directly to the customer.
Entity Based Exemption
An entity-based exemption is an exemption from tax based on who the purchaser is. Examples of entity based exemptions include sales to the federal government, local government, farmers, manufacturers, and retail sellers.
Equal Protection Clause
The Equal Protection Clause of the 14th amendment of the U.S. Constitution prohibits states from denying any person within its jurisdiction the equal protection of the laws. The laws of a state must treat an individual in the same manner as others in similar conditions and circumstances. This is very applicable when considering federal legislation impacting sales taxes on commerce across state lines where the out-of-state sellers and purchasers must be treated the same as in-state sellers and purchasers. Generally, classifications for economic purposes (applying taxes differently to different types of businesses) is subject to the lowest level of scrutiny under the equal protection clause.
An excise tax is an intra-jurisdictional indirect tax on the sale, production for sale, or transportation of goods or licenses for specific activities within the borders of the jurisdiction with authority to levy the tax. Excises taxes are often combined with other indirect taxes such as sales tax or VAT. Excise tax differs from sales tax or VAT in that excise taxes normally apply to a narrower range of products; taxed at a higher portion of the retail sales price, and it is normally a per unit tax, whereas sales tax and VAT are a percentage rate on the price of the good or service sold. Gasoline and other fuels, and tobacco and alcohol, commonly referred to as sin taxes, are common targets for excise taxes.
Exemption means a product, service, purchaser, intended use, period of use, and even the seller can determine whether or not the item sold is exempt from tax, or nontaxable. Some statute authorities specify a difference between 0 rated and exempt transactions. When reporting, many administrators will specify a difference between a product or service based exemptions and exemptions based on the purchaser.
The most common product/service-based exemptions include most food for home consumption, excluding candy, soda, and similar items and most services. The most common purchaser based exemptions include retailers, federal, state, tribal, and local governments, foreign dignitaries, and farmers. Other types of exemptions are less common.
Exemption certificate means the purchaser—not the retailer—has the responsibility for determining whether or not a sale is exempt from tax.
If the purchaser does not submit a valid exemption certificate to the retailer, the retailer has the responsibility to assess and collect the sales tax from the purchaser. The retailer has the responsibility to determine the validity of the exemption certificate. Only valid exemption certificates protect the retailer from assuming responsibility for the sales tax on the exempt transactions. Failure to obtain an exemption certificate at the time of sales may leave the retailer with the responsibility to pay the tax to the state if the retailer is assessed tax under audit by the state.
Filing frequency defines how often an administrative authority requires a business to file a tax return. Common filing frequencies include monthly, quarterly, semi-annual, and annual. Late filings are the most common sales and use tax penalties.
A filing period is the period of time in which a tax return is filed.
Financial Transaction Tax
A financial transaction tax is a levy on a specific, taxable monetary transaction—not a levy on financial institutions—for a specific purpose. Institutions that never carry out a taxable transaction are not subject to the transaction tax. If they carry out one such transaction, they can only be taxed for that one. A financial transaction tax is not usually considered to include consumption taxes paid by consumers; it's most commonly associated with the financial sector.
Freight is the cost of shipping a good from the seller to the purchaser. Tax treatment of the freight will depend on what is being shipped on the invoice, if the freight is separately stated, and if there is handling included or separately stated. Timing of payment of freight also affects ownership of the good and the timing of when title to the good is transferred between parties to the transaction.
Goods and Services Tax
A goods and services tax is a value-added tax imposed by some countries on goods and services. The amount of the tax varies from country to country. In Canada, GST was introduced January 1st, 1991 by then Prime Minister Brian Mulroney and finance minister Michael Wilson.
For tax purposes, gross income includes all receipts and gains from all sources. It is the starting point to calculate your tax liability for federal and state income tax.
Gross Proceeds of Sales
Gross proceeds of sales refers to the value proceeding or accruing from the sale of any goods or services, without any deduction whatsoever paid or accrued and without any deduction for losses.
Gross Receipts Tax
Gross receipts tax is the tax on the gross revenues of a company. These taxes are typically not directly passed on to the consumer. Gross receipts taxes can cascade as they move down the supply chain and are paid multiple times.
Harmonized Sales Tax
Harmonized sales tax (HST) is a Canadian consumption tax. It is used in provinces where both the federal goods and services tax (GST) and the regional provincial sales tax (PST) have been combined into a single value-added sales tax. Five of ten Canadian provinces have enacted HST: Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.
Home Rule States
Specific to the United States (specifically, the states of Colorado and Arizona), a home rule state is one that allows local jurisdictions to modify the state tax base. These states also are locally administered. Home rule states are often confused with locally administered states like Alabama, Arkansas, and Idaho. Local jurisdictions in these states are not authorized to change their tax base by taxing something that is exempt for the state, or exempting something locally that is taxable for the state.
Hybrid situsing is when some combination of origin and destination jurisdictions are used in the tax determination. California and Texas are both hybrid situsing states. This means that if you're doing business there, you're likely to encounter complex rules to decide which jurisdiction's tax applies.
A direct tax and indirect tax are distinguished by who collects or complies with the tax. An indirect tax is a tax collected by a seller from the purchaser, and the purchaser bears the economic burden of the tax. The seller must properly determine the appropriate tax to charge, collect the tax, report it to the taxing jurisdiction, then remit the funds collected. It's important to note that other examples of indirect taxes (provide examples) may occur outside the retail sales context.
An intercompany transaction is an internal transaction between two associated companies who file a consolidated tax return or financial statement.
Intergovernmental Tax Immunity
Intergovernmental tax immunity is a doctrine that prevents the federal government and individual state governments from intruding on each other's sovereignty.
Interjurisdictional sales are sales transactions that cross one or more geographic boundaries. Typically these boundaries are city, state, or country.
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act promotes and preserves the commercial, educational, and informational potential of the Internet and bars federal, state, and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes.
Intra-jurisdictional (state) sales are sales transactions that occur completely within the geographic boundaries.
An intracompany transaction is a transaction occurring between two subsidiaries of the same parent company.
A jeopardy assessment is a tax collection device used by federal and state taxing authorities to assess an amount of tax when the delay associated with ordinary prepayment deficiency procedures would jeopardize or endanger the ability to levy and collect the tax.
Within the context of indirect taxes, a jurisdiction is the governmental entity with taxing authority over a particular geographic region.
Landed cost means the total price of a product once it has arrived at a buyer's door. When you think "landed cost," think everything that went into getting the product from Point A to B, including the original price of the product, customs, freight, duties, taxes, insurance, currency exchange, packing, handling, and any other fees.
A lease is a contractual agreement requiring the lessee (the asset user) to pay the lessor (the asset owner) for ongoing use of an asset. A lease differs from a rental in that a rental focuses the contractual agreement on tangible property, whereas a lease focuses the contractual agreement on real property.
A luxury tax is a tax on luxury goods, i.e., products not considered essential. It may be modeled after a sales tax or VAT and charged as a percentage on all items of particular classes.
Managed Compliance Agreement
A managed compliance agreement is a method for determining the tax liability allowed in some states, typically in the context of an audit. Such an agreement can be helpful in allowing the state and a taxpayer to agree on a tax amount based on sampling of historic transactions then applying the determined rate to a defined set of taxable transactions.
Marketplace Fairness Act
The Marketplace Fairness Act is legislation aiming to empower state governments to collect sales and use taxes from retailers with no physical presence in their state. The legislation is pending in the United States Congress. Opponents of the legislation have frequently cited an heavy burden on small business owners.
Multistate Tax Commission
A multistate tax commission is a body created by the Multistate Tax Compact, a partnership of states, to provide uniformity on state and local tax issues for taxpayers required to pay state and local taxes in multiple states.
Nexus is the connection or link that a retailer has with a state. If the retailer has sufficient nexus in a state, the state and its municipalities have the authority to impose sales tax collection and remittance responsibility on the retailer.
The determination of nexus is the first step in determining a retailer's sales tax collection responsibility. Nexus may be established by the ownership or lease of real estate or tangible personal property or by having employees in a state. Though it is more difficult to determine, nexus is also established through indirect physical presence, such as independent contractors or agents.
Online retailers leveraging fulfillment services such as Fulfillment by Amazon (FBA) expose themselves to an increased number of nexus locations as they distribute product to warehouses throughout the United States.
Occasional sale refers to the sale of tangible personal property that was used mostly in the course of the seller's business, where sales of that type of personal property are not a normal part of the seller's trade.
For example, say a lump-sum contractor sells a backhoe in October, a typewriter in December, and a crane in February. The contractor has not sold, leased, or rented any construction equipment prior to the sale of the backhoe; therefore, the contractor can sell the backhoe and typewriter tax-free as occasional sales. The sale of the crane is the third sale within twelve months from the sale of the backhoe. The sale of the crane is not an occasional sale. The contractor must obtain a permit, collect tax on the sale of the crane and, until an intervening twelve months have passed between sales, all subsequent sales of taxable items.
A privilege tax is a tax levied in exchange for a privilege or license granted to the taxpayer. The fee for registering a motor vehicle is one example of a privilege tax.
Privileges and Immunities Clause
The Privileges and Immunities Clause (U.S. Constitution, Article IV, Section 2, Clause 1, also known as the Comity Clause) prevents a state from treating citizens of other states in a discriminatory manner.
A proportional tax (also called a flat tax) is a tax system that requires the same percentage of income from all taxpayers, regardless of their earnings. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. The proportional tax is in contrast to a progressive tax, where taxpayers with higher incomes pay higher tax rates than taxpayers with lower incomes.
Provincial Sales Tax
Provincial sales tax (PST) refers to one of three sales taxes (the other two being goods and services tax and harmonized sales tax) levied by provinces in Canada British Columbia, Saskatchewan, Manitoba, and Quebec, which all collect PST. In Quebec, it is referred to as Quebec Sales Tax or QST.
A regressive tax is generally a tax that is applied uniformly, which means from the standpoint of percentage of income, it hits lower-income individuals harder than high-income individuals.
Remittance is the process of sending AND amount of money sent to satisfy an obligation, most often done through an electronic network, wire transfer, or mail.
A rental is a contractual agreement requiring the lessee (the property user) to pay the lessor (the property owner) for ongoing use of tangible personal property.
A resale certificate is a document used by a registered business when it purchases goods intended for resale and, when valid, allows individuals or businesses to purchases taxable goods tax free. This certificate acts as a written statement that the business owners and operators will sell the purchased item rather than using them prior to sale or keeping them for personal use. It may also be used when purchasing certain services for resale.
Retail Sales Tax
Retail sales tax is collected by businesses conducting retail sales on behalf of the taxing authority who (state, county, city, etc.). This sales tax is remitted to the appropriate taxing jurisdictions in an ongoing basis determined by the amount of sales tax being collected. Typically this frequency is monthly, quarterly, or annually.
A retailer is a business that, or person who, sells goods to the consumer, as opposed to a wholesaler or supplier, who normally sell their goods to another business.
A sale-leaseback is a situation wherein party A sells property to party B and then party A immediately leases the property back from party B.
Sales tax is a point of sales tax imposed on retail goods (tangible personal property) and services. Typically, it is collected by the seller and remitted to the state on an ongoing basis. Sales tax is also known as Sellers Use Tax.
Sales Tax ID
Sales tax ID is the same as "tax ID" or "tax ID number" and is used to identify your business entity and track your business' taxation responsibilities. The sales tax ID number is also known as the federal tax identification number (the U.S. Internal Revenue Service refers to this number as the Employer Identification Number, or EIN). This number is not required for all businesses but every business has the option of obtaining one.
Sales Tax License
Also known as a sales tax permit, a sales tax license is a permit required in some jurisdictions for entities required to collect and remit sales tax. Not all jurisdictions require a separate license or permit from the required business license.
Sales Tax Permit
Also known as a sales tax license, a sales tax permit is a permit required in some jurisdictions for entities required to collect and remit sales tax.
Sales Tax Situsing
Sales tax situsing is defined as the identification of the location(s) at which a sale occurs for purposes of sales and use tax assessment.
Shipping charges are costs associated with the delivery, shipping, and handling of goods. In many U.S. tax jurisdictions, shipping charges are taxable.
The situs of property is where the property is treated as being located for legal purposes including taxation. Also referred to as the "source".
Statute authority is the government entity with the sovereignty to legislate and administer taxes within their borders. Most governments legislate and administer their own taxes. However, some governments delegate their administrative responsibilities to other government or nongovernment entities.
Examples of statute authorities include countries, states, and, in the case of Home Rule States, county and city governments that have been granted limited authority to legislate their own tax base.
Streamlined Sales Tax
Streamlined sales tax is a national effort by state and local governments and the private sector to simplify and modernize sales and use tax collection and administration. A national effort produced the "Streamlined Sales and Use Tax Agreement," the mission of which was to develop measures to design, test, and implement a sales and use tax system that radically simplifies sales and use taxes and makes the burden of compliance the same for all sellers and all types of commerce.
Successor liability refers to the concept of the responsibility of a purchaser of a business or an asset to satisfy pre-existing legal obligations of the original owner.
Tangible Personal Property
Tangible personal property (TPP) is any property that is perceptible to the senses. In general, all tangible personal property is subject to sales tax unless the state specifically excludes it from tax. States also include many types of digital products as TPP even though they are not perceptible to the senses.
A customs duty or due is the indirect tax levied on the import or export of goods in international trade. In economic sense, a duty is also a kind of consumption tax. A duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied on exports is called an export duty. A tariff, which is actually a list of commodities along with the leviable rate (amount) of customs duty, is popularly referred to as a customs duty.
A jurisdiction with administrative authority will review and analyze a taxpayer's books of record to determine if they are complying with the law over which the jurisdiction has authority.
Auditors may be incentivized to maximize audit assessments. The taxing jurisdictions have the authority to audit the books and records of retailers to ensure that the retailer is properly calculating, assessing and remitting the tax on all taxable transactions. Most jurisdictions have rules regarding how long taxpayer records must be maintained, and if they are not maintained, this has consequences for the audit, the period of an audit, and assumptions that may be made to conclude the audit.
A tax jurisdiction is an area subject to its own distinct tax regulations. Examples include a municipality, parish, city, county, or country.
Tax liability (or total tax bill) is the amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government.
In a tax system and in economics, tax rate describes the ratio (usually expressed as a percentage) at which a business or person is taxed.
Situs literally means position or site. For tax purposes, it is the jurisdiction (state, county, and city) that has the legal authority to tax a transaction. For sales tax purposes, it is generally the jurisdiction in which a sale of tangible personal property or taxable services occurs. For use tax purposes, it is the jurisdiction in which tangible personal property or taxable services are used.
Situs can be easy to determine when the entire transaction occurs at the point-of-sale; it's much more difficult to determine when the transaction involves numerous sites, such as when the point-of-sale differs from the point of delivery or title transfer. As you can imagine, determining situs is particularly complicated for communications and internet-based sales transactions.
Taxable Goods and Services
Taxable goods and services are those goods and services for which sellers can impose and collect sales tax upon completion of the sale or service contract.
A trade discount is a reduction to the published price of a product typically offered to a high-volume purchaser, like a wholesaler. When it comes to a trade discount and the associated sales tax, the tax is calculated and collected on the amount of the net discount sale price. For example, if you buy a great leather wallet regularly priced at $100, which is discounted to $90, sales tax will be collected on the net sale of $90 rather than the normal selling price. You also get a sweet wallet.
Transactional Privilege Tax
Transactional privilege tax (TPT) refers to a gross receipts tax levied by the state of Arizona on certain persons for the privilege of conducting business in the state. TPT differs from the "true" sales tax imposed by many other U.S. states as it is imposed upon the seller or lessor rather than the purchaser or lessee.
True Object Test
The true object test determines whether the "true object" of the consumer is to obtain a tangible item or a service and applies to the physical items included in the price of the service sold. However, if the main purpose of the transaction (the true object) is the purchase of property or equipment, and only secondarily the services provided to support those goods, the entire transaction is subject to sales tax, as determined in some cases by The True Object Test.
An ad valorem tax is a tax based on the value of real estate or personal property. Typically imposed at the time of a transaction (similar to, say, sales tax) an ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event (e.g. grandma passes away and you get your inheritance, and a tax on that.)
Use Based Exemption
A use-based exemption means an exemption offered in many taxing jurisdictions that exempts from taxation the sale of an otherwise taxable good or service based on the use to which it will be put.
Also commonly referred to as "consumers use tax," a use tax is a transactional tax imposed on the sales price of goods and services purchased for consumption (and not resale) when no sales tax was charged by the retailer. Use tax is designed to balance tax burdens imposed on in-state and out-of-state purchases.
Use tax is complementary to sales tax. That is, no property or services are subject to use tax if they would not be subject to sales tax. Use tax is imposed on the purchaser of tangible personal property or taxable services otherwise subject to sales tax where the vendor/retailer did not collect the tax. This tax is usually associated with untaxed purchases made from out-of-state vendors. It can also be due on certain in-state purchases. In most cases, the liability for use tax rests equally with the vendor and the customer.
A use tax is a type of excise tax levied in the United States by numerous state governments. It is assessed upon tangible personal property purchased by a resident of the assessing state for use, storage, or consumption in that state (not for resale), regardless of where the purchase took place. If a resident of a state makes a purchase within his home state, full sales tax is paid at the time of the transaction. The use tax applies when a resident of the assessing state purchases an item that is not subject to his home state's sales tax. Usually, this is due to out-of-state purchases, as well as ordering items through the mail, by phone, or over the Internet from other states. The use tax is typically assessed at the same rate as the sales tax that would have been owed (if any) had the same goods been purchased in the state of residence.
User fees are an excise tax, often in the form of a license or supplemental charge, levied to fund a public service.
Value Added Tax
A value-added tax (VAT) (or goods and services tax) is a form of consumption tax. From the buyer's perspective, it is a tax on the purchase price. From the seller's view, it is a tax only on the value added to a product, material, or service, which value has been added between the time the seller obtained the produce, material or service, and the time the tax is being applied.
The purpose of VAT is to generate tax revenues to the government similar to the corporate income tax or the personal income tax. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
A vendor (or retailer) is the collection agent for the state or local jurisdiction that imposes the sales tax. A retailer that sells directly to the consumer of taxable personal property or services has the legal responsibility to collect the tax for the state. If the retailer fails to collect and remit the tax, the state can impose the tax directly on the retailer along with penalties and interest for failure to collect and remit the tax.
Also known as a "timely filing discount" or a "collection allowance," a vendor discount is meant to compensate business owners for the time required to record, file, and remit collected sales tax to state revenue agencies.
By filing and remitting sales tax on time (no late filing/payments), businesses in locations offering vendor discounts avoid penalties and interest and gain compensation for the time spent as the taxing jurisdiction's tax agent. One way or another, all businesses with sales tax exposure are required to file and remit collected taxes. Furthermore, filing schedules are assigned and very specific. Ignoring/missing deadlines leads to penalties and charged interest—a double whammy!We don't know a lot of business owners who enjoy managing sales tax compliance. Plan accordingly and make the most of your sales tax responsibility.
By filing and remitting sales tax on time
Voluntary Disclosure Agreement
A voluntary disclosure agreement (VDA) is a program designed to allow businesses collecting and remitting sales tax to receive certain benefits (e.g., a limited "look back" period, some anonymity, some penalties and fees waived, and protection from prior business owner's liability) by proactively disclosing prior period tax liabilities as defined by the local taxing authority.
Participation in a voluntary disclosure agreement program offers many benefits for businesses that (knowingly or unknowingly) have not achieved sales tax compliance. Typically, such programs are not available for businesses that have filed in the past and fallen behind on their filing responsibilities. Rather, VDA programs are intended for businesses new to sales tax compliance and aiming to "catch up." Moreover, it is up to the business to contact the appropriate taxing authority and initiate the VDA program. Once a business has been targeted and contacted, participation in a VDA is no longer an option. In other words, be proactive!
Wholesaling is the sale and distribution of goods to users—retailers, wholesalers and merchants, and/or industrial, commercial, and institutional users—other than end consumers. Wholesalers can also act as middlemen, brokering deals between these businesses.
Zero-rated goods are products on which a value-added tax (VAT) is not levied in countries using a VAT. Examples of goods that may be zero rated include many types of food and beverages, exported goods, and donated goods sold by charities.