Sales and use tax are two very complicated issues for business owners across the country. Tax laws are constantly being revised at the state and local levels, making tax laws a very complex issue for business owners. We have put together a guide on how to manage sales and use tax so you can make sure your business is complying with the laws.
How is Sales Tax Different from Use Tax?
Many wonder how sales tax differs from use tax. Sales and use tax are used as a term, but only one apples to a single transaction, not both. Sales tax is defined as a state tax imposed on retail transactions on the purchase of tangible personal property and in some states, services. Sales tax is paid by the consumer at the time of purchase to the seller. The seller is then responsible for reporting the sales and remitting the tax collected to each jurisdiction it has collected the taxes in. Currently general sales tax is imposed by 45 states and District of Columbia.
Use tax includes use tax for the storage, consumption, or use of tangible property or service that can be taxed. Use tax comes in two forms: seller use or consumer use. Seller use occurs when the seller of the product or service collects the tax at the point of sale. Consumer use occurs when the consumer assesses the tax themselves and then reports the tax. If the seller does not collect the required use tax, the purchaser is required to report and pay the use tax. Consumer use tax typically occurs when if the consumer is making a purchase from an out of state vendor that is not required to collect taxes on their sales.
What is Nexus?
Nexus is a tie or connection to a state or jurisdiction. In taxation terms, nexus is whether or not a business has a presence in a state or local jurisdiction to collect taxes. Nexus happens when there is a high enough business connection with a state that would allow the state to require tax collection by the business. The connection can come in many forms, including the following:
- Physical location such as a warehouse, store or office
- Sales personnel
- Company property
- Any other business activity that goes beyond the U.S. Postal Service or common carrier
Once a connection has been made, or in other words nexus exists, it becomes the seller’s responsibility to collect tax on all transactions that are deemed taxable by the jurisdiction. The business must then submit the tax to the appropriate entities. These entities include the Tax Commission, Department of Revenue, Department of Taxation, or State Board of Equalization. If a business or seller does not have nexus in a state, the responsibility of paying the tax shifts to the consumer.
In the United States there are more than 12,000 taxing jurisdictions and local governments. Businesses that operate across multiple states and jurisdictions will have difficulty administering sales and use tax collection and reporting to the proper entities if they do not utilize an automated sales and use tax system.
Contact the staff at Tobin & Collins today to speak with an experienced CPA about managing sales and use tax for your business in New Jersey.