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Sales and Use Tax LifeBack Tax
Forty-five states and the District of Columbia levy some form of sales tax on the purchase of certain goods and services. Each state determines which purchases are taxable and which are exempt. To avoid double taxation, retail sales tax is only usually only charged to the end consumer, and does not apply to items purchased for resale. A seller is responsible for collecting retail sales tax and remitting it to the state, so the seller is held liable for unpaid sales tax, though the tax is paid by the buyer.
Sellers are only required to charge retail sales tax if they have "sales tax nexus" in the buyer's state, meaning that they are considered to operate in that state's area of jurisdiction and are registered as a seller in that state. Traditionally, this meant that states could not force sellers from another state to collect and remit sales tax.
To prevent out-of-state sellers from undercutting domestic businesses, all states that collect sales tax also levy a "consumer use tax" on items purchased for use or consumption in that state, but for which the seller did not collect sales tax. Usually, this refers to taxable purchases from an out-of-state retailer and shipped to the buyer's state. Consumer use tax applies to the same items as retail sales tax, but is remitted directly from the buyer.
For instance, if someone buys a couch online from a store in New York and has it shipped to their home in California, the seller does not collect California sales tax since they do not operate in California, and the buyer does not pay New York sales tax because they did not make the purchase in New York. However, the buyer is still obligated to pay the amount of tax that a California-based seller would have charged. This tax obligation is the consumer's use tax.
In practice, use tax is virtually impossible to enforce. Due to the difficulties of tracking out-of-state purchases, states tend to rely on taxpayers to voluntarily calculate, report, and pay their use taxes. However, many individuals are unaware that they still owe tax on online purchases when no sales tax was collected. In recent years, many states have shifted efforts toward enforcing seller collection of sales tax.
Until recently, a seller was only considered to have sales tax nexus if they had some sort of physical presence in that state, such as a store, an office, an employee, or inventory storage. However, in 2018, the U.S. Supreme Court ruled that states may also require sellers to charge retail sales tax based on economic nexus, or in other words, how much sales the seller makes in a particular state.
Depending on state laws, economic nexus may be defined by annual sales revenue or the number of transactions. For instance, in South Dakota, sellers are considered to have economic nexus if they generate more than $100,000 in annual sales revenue or make more than 200 sales transactions to buyers in South Dakota. Online sellers who exceed a state's thresholds for economic nexus will need to register with that state for a seller's permit, and must collect and remit retail sales tax from buyers in that state, despite never setting foot in that state.
Please contact us if you are currently struggling due to unpaid sales or use tax. State governments can be very aggressive when pursuing back taxes, and may even resort to putting a tax lien on your business. We at Life Back Tax are committed to defending taxpayers and their livelihoods, and will represent your interests to the state's taxing authority.
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