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What is a Sales Tax and What is a Use Tax?

Understanding the nature of a sales tax is critical to establishing an effective program to administer the tax. So, what is it?

Sales Tax: The sales  tax on the sale of tangible personal property and certain taxable services.

If you sell tangible personal property to someone else, that sale is presumed to be taxable unless it is specifically excluded/exempted by statute. On the other hand, if you sell a service to someone, that sale is presumed to be non-taxable unless that service is specifically included by statute.

The presumption of taxability is also important in another sense. Have you ever heard the term "innocent until proven guilty?" Unfortunately, that is not the way it works in connection with the sales tax. When you make a sale of tangible personal property or a taxable service, the sale is presumed to be taxable, which means the burden of proof to show that it is not a taxable transaction falls on you.

Use Tax:  A use tax is a tax on the storing, using, consuming, and sometimes distributing tangible personal property or providing a taxable service. In other words, you will be subject to the use tax in the state where that event occurs.

A use tax is considered a compensating tax or complementary tax. This means the use tax is assessed and due on the property or taxable service when the sales tax has not been paid. For example, have you ever bought something from a mail order company and they did not charge you tax on the item. Did you self-access (this makes sense as access, but it also makes sense (to me) as assess—is access correct? and pay the use tax due on that item? You see, you bought an item and did not pay sales tax to the seller, but you stored, used, or consumed that item in your state. The purchase is now subject to your state's use tax.  As a general rule, all states that have sales tax have a use tax.

If you want to learn more about this topic, please take part in a webinar titled Golden Rules of Sales and Use Tax featuring Andria Siciliano and myself on February 11 at Noon E.T. 

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.

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