We are just finishing up our discussion of sales and use taxes, who must pay them and when they are due. Small and mid-sized businesses, that is, businesses that may not have a full-time tax expert on hand, may be more vulnerable to the confusion that seems to be the hallmark of sales and use taxes. One reason is that the business must be fluent in the tax laws of every state it does business in, regardless of the nature of the transaction. That is a lot of ground to cover when you are trying to run a business.
Sales and use taxes all hinge on something called nexus. We talked about nexus in our Nov. 9 post, noting that a company that has a physical presence or agent in a jurisdiction is subject to the sales tax of that jurisdiction. If a company has no presence or agent in a jurisdiction -- if there is no there there -- the company must pay the use tax of its home jurisdiction.
Our example was a Minnesota company buying widgets from a vendor's Wisconsin location, and Wisconsin does not tax widgets. The Minnesota purchaser must pay a use tax to the state of Minnesota if the vendor has no nexus with our state.
If nexus exists, though, the Minnesota company making that purchase in Wisconsin must pay Wisconsin sales tax but no Minnesota use tax. There is an exception: If Wisconsin's sales tax rate is lower than Minnesota's, you must pay the difference to Minnesota as use tax.
So, Wisconsin has a 10 percent sales tax on widgets, while Minnesota has a 15 percent tax. The purchaser pays the 10 percent sales tax to Wisconsin and sends an additional 5 percent use tax to the state of Minnesota.
Also, if the Wisconsin company has a physical presence or an agent in Minnesota, the transaction now incurs Minnesota sales tax. If the seller does not collect the tax, the buyer must pay it to the state.
Minnesota has established dollar minimums to make sure that only significant purchases are taxed. That may not be the case in other states, though, or any of the other 7,200 taxing jurisdictions in the country.
Even if a business masters the nexus rule, Internet sales put a twist on it that many states and Congress have yet to address. You can see how a business may find itself in a confusing labyrinth of competing tax laws.
Source: Accounting Today, "Businesses Frequently Overpay Sales and Use Taxes," Michael Cohn, Oct. 13, 2015