If you are a toy store in Minneapolis, you collect a 7.775 percent sales tax on most in-store transactions. The tax does not all go to the state: Minnesota’s sales tax is just 6.875 percent. But Hennepin County has a 0.15 percent tax and Minneapolis a 0.5 percent tax. That is all rounded out with the Transit Improvement Tax of 0.25 percent. If you are new to business, you could easily be confused.

Minneapolis businesses are not alone in our multiple tax obligations. The U.S. boasts 7,200 taxing jurisdictions, according to McGladrey LLP, and Internet sales can create sales tax obligations in any number of them. For example, McGladrey says, a telecommunications company could file 4,000 tax returns every year.

It’s no surprise, then, that small and mid-size businesses may not pay some jurisdictions while overpaying others. Individuals, too, may have no idea they are on the hook for sales and use taxes.

But what is the difference between sales and use taxes?

Sales tax is the tax levied on the sale of goods or, in some states, services. As in our example above, a sales tax rate is usually a percentage of the purchase price. A Minnesota business buys widgets from a local manufacturer and must pay tax on the transaction. Usually, the seller collects the tax and pays it to the state.

Use taxes apply to goods that are purchased outside of the tax jurisdiction for use in the jurisdiction. So, a Minnesota business purchases widgets from a vendor in Wisconsin, where widgets are not taxed. The business must pay a use tax to the state of Minnesota. The idea is to encourage people to buy locally and to pay local taxes.

The tax obligation changes if the Wisconsin company has a physical presence or an agent in Minnesota. That is where the idea of nexus comes in.

We’ll finish this up in our next post.

Source: Accounting Today, “Businesses Frequently Overpay Sales and Use Taxes,” Michael Cohn, Oct. 13, 2015