Sometimes sales and use tax issues can seem confusing simply because of the terminology used. In order to help decipher some of the more common questions that arise when researching sales and use tax issues, we’ve created a glossary of frequently used terms that are useful for understanding sales tax regulations. Links within this glossary direct to posts that explain how these terms are important for understanding sales tax compliance and making sense of complicated regulations. Check back often, as the list will continue to grow as more posts and definitions are published.
In law, a relationship in which one party (the agent) acts on behalf of and under the express or implied control of another (the principal) in dealing with third parties. In general, if agency exists between parties, then nexus most likely exists as well.
Tax amnesty is an opportunity for taxpayers to disclose incomplete or unreported information about previous tax periods with limited liability for back-taxes and/or interest or other penalties.
Every state that imposes an income tax relies on formulas to apportion a corporation’s income among those states in which the corporation does business. Apportionment formulas attribute income to the states on the basis of factors which produce the income. These factors are typically: property, payroll and sales. To derive the amount of income
taxable in the state, the value of each factor in a state is first compared to the total value of that factor for the corporation. As an ecommerce business, income tax would be owed to every state in which you have nexus and you derived income from. For example, if you have nexus in Colorado, New Mexico, and California and had sales in each of these states, then based on the formulas provided by each state a portion of your overall income would be taxable in each of those states. This liability is in addition to your obligation to collect and remit sales taxes.
An administrative division or municipality. The size of a borough depends on the state. For example, in Alaska it is similar to a county while in Pennsylvania it is similar to and smaller than a city. These jurisdictions may impose additional local sales and use taxes.
The Commerce clause, in part, authorizes Congress to “regulate commerce with foreign nations, and among the several States.” The Supreme Court has ruled that the Commerce Clause prohibits states from enacting laws that might unduly burden or inhibit the free flow of commerce between the states. In Quill vs. North Dakota, 504 U.S. 298 (1992), the Supreme Court ruled that the taxpayer must have “substantial nexus” with the taxing state in order for the state to impose its tax on the taxpayer.
A contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to a company that will ultimately be resolved when one or more future events occur or fail to occur.
This is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer.
The Due Process Clause states that no state shall “deprive any person of life, liberty, or property, without due process of law.” With respect to state taxation, the Supreme Court has interpreted this to prohibit a state from taxing a corporation unless there is a “minimal connection” between the company and the state in which it operates. See also “Nexus”.
This refers to an indirect type of taxation imposed on the manufacture, sale or use of certain types of goods and products. Use tax is a type of excise tax imposed on both businesses and individuals.
The purchaser – not the retailer – has the responsibility for determining whether or not a sale is exempt from tax. If the purchaser does not submit a valid exemption certificate to the retailer, the retailer has the responsibility to assess and collect the sales tax from the purchaser. The retailer has the responsibility to determine the validity of the exemption certificate. Only valid exemption certificates protect the retailer from assuming responsibility for the sales tax on the exempt transactions. Failure to obtain an exemption certificate at the time of sales may leave the retailer with the responsibility to pay the tax to the state if the retailer is assessed tax under audit by the state. Exemption certificates from out-of-state retailers are valid, however, it is best to confirm with the state that issued the certificate that it is still valid. Some states provide specific exemption certificates that purchasers should provide. Other states specify what information must be included in an exemption certificate. Typically, the certificate should include the following information:
- The date, which should be before or the same as date of the sale,
- The signature of the purchaser or the purchaser’s agent or employee (always ask for identification),
- Both the purchaser’s and the seller’s names and addresses,
- The purchaser’s business license or tax registration number,
- A description of the property being purchased, and
- The basis of the claimed exemption.
In general, exemptions are statutory exceptions eliminating the need for the retailer to collect sales tax on a particular transaction or on all transactions with a customer. The most common exemption is “sale for resale,” which allows retailers to purchase products from wholesalers free of tax.
This is another term for transactional taxes imposed by Hawaii. It is technically not a sales tax, but a “Gross Receipts Tax”, however, since it is typically passed on to the consumer it is in the same vein of sales and use taxes. See also “Gross Receipts Tax”.
A tax on the total gross revenues of a company, regardless of their source. It is similar to a sales tax, but it is levied on the retailer of tangible personal property and/or services rather than the consumer of the goods or services. Even though the gross receipts tax is imposed directly on the retailer, the tax is ultimately passed through to and charged to the consumer and therefore considered to be a type of sales and use tax. Arizona, Delaware, Hawaii, Illinois, New Mexico, and South Dakota all have a gross receipts tax.
Also known as a local sales/use taxes. Please see our blog post “What Is ‘Home Rule’ and Why Is It Important?’
A liability is a known obligation.
This is a type of special-purpose tax implemented and levied at the city or county level. It most often exists when Home Rule municipalities exist within a state. Many states have some form of a Local Option Sales Tax. For example, Broomfield, Colorado imposes a “Flatirons District” improvement tax, however this tax only applies to certain zip codes within the city, specifically those located in and around the Flatirons mall area.
The MFA is proposed legislation pending in the United States Congress that would enable state governments to collect sales taxes and use taxes from remote retailers with no physical presence in their state.
The minimum connection that a retailer is required to have with a state before the state and its municipalities have the authority to impose sales tax collection and remittance responsibilities on the retailer. Basic nexus is established by the ownership or lease of real estate or tangible personal property or by having employees in a state. Other types of nexus are also established through indirect physical presence, such as independent contractors or agents. Click on the below type of nexus you are interested in to learn more about it.
A retailer that does not collect sales tax is a retailer that sells taxable property or services to customers who are not exempt from sales and use tax but does not collect sales or use tax. Certain states (Colorado, Oklahoma, and South Dakota) are currently attempting to enforce reporting requirements that would obligate Non-Collecting Retailers to provide notice to customers twice that they have an obligation to pay sales or use tax — once at the time of purchase and then again at the end of each calendar year. Colorado currently has an injunction preventing it from enforcing these laws, however, it is a developing trend that has severe compliance burdens associated with it.
An administrative division or municipality. It is only used in Louisiana and it is similar to a county.
Software as a Service is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet. For example, Gmail is an email SaaS. Taxify is a SaaS for online sales tax made easy.
A tax on the sales price of tangible personal property or taxable services. The responsibility for assessing and collecting sales tax falls on the vendor/retailer making the sale. The tax is most commonly collected at the point-of-sale. In some states, the sales tax is also known as a “privilege” tax and is imposed directly on the retailer for the privilege of doing business in the state. See also “General Excise Tax” and “Gross Receipts Tax”.
This term refers to the physical location where a sale occurs or where a sale is designated as having occurred. “Origin sourcing” refers to sourcing sales at the physical location of the retailer. When sales are sourced based on where the customer takes possession of a product or service — such as through a delivery – this is referred to as “destination sourcing.” Individual states’ sourcing rules vary for ecommerce transactions – see our State-by-State Compendium for specifics.
Streamlined Sales Tax (SST) is a multi-state initiative to reduce the burden of collecting, reporting and remitting sales and use tax across state lines for both e-commerce and traditional brick-and-mortar businesses. As of June 2011, there are 24 participating states in addition to Washington, D.C. The following states that have passed legislation to conform to the Streamlined Sale and Use Tax Agreement: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. Please see the Streamlined Sales Tax site for more information.
Nexus is created once a substantial presence is established. Unfortunately, this is not clearly defined by each state and can vary from 1 day to a number of days in other states. See also “Due Process Clause” and “Nexus”.
Any property that is perceptible to the senses (i.e. taste, touch, sight, etc.). In general, all tangible personal property is subject to sales tax unless the state specifically exempts it. States also include many types of digital products as TPP even though they are not perceptible to the senses. States commonly exempt medical devices, prescriptions, and food.
Taxing jurisdictions have the authority to audit the books and records of retailers to ensure that the retailer is properly calculating, assessing and remitting tax on all taxable transactions.
For tax purposes, situs is the jurisdiction (state, county and/or city) that has the legal authority to tax a transaction. Situs is easily determined when the entire transaction occurs at the point-of-sale, but is more difficult to determine when the transaction involves numerous sites, such as when the point-of-sale differs from the point of delivery or title transfer (see Drop Shipping). Situs is most often referred to when determining nexus. For ecommerce purposes, whether a state observes origin or destination based sales tax rules will have a large impact on situs. See also “Nexus” and “Sourcing”.
In general, professional and personal services are not taxable unless the state includes specific types of services in their definition of taxable transactions. Examples of taxable services in many states include: communications, data processing or information analysis. The taxation of services varies widely among the states. Some of the services that can be taxed by certain states are: information services, data processing, custom computer programming, training, installation, delivery charges, hair care, security and detective services, background screening, commercial property rental, and employment verification services.
This term refers to affiliated companies that sell merchandise via catalog, over the Internet and through traditional retail store operations.
A tax imposed on the sales price of goods and services purchased for consumption (and not resale) when the retailer charged no sales tax. Use tax is complementary to the sales tax. It is imposed on the purchaser of tangible personal property or taxable services. This tax is usually associated with untaxed purchases made from out-of-state vendors. For example: if a Colorado business purchases office supplies from an online retailer and this transaction does not incur sales tax because the retailer does not have nexus in Colorado, the purchaser of the items would still be liable for the use tax. Use taxes are calculated at the same rate that sales taxes are.
The retailer or vendor is the collection agent for the state or local jurisdiction that imposes sales tax. A retailer that sells directly to the consumer of taxable personal property or services has the legal responsibility to collect the tax for the state. If the retailer fails to collect and remit the tax, the state can impose the tax directly on the retailer along with penalties and interest for failure to collect and remit the tax.
A Vendor’s Fee, also known as a Service Fee, is a deduction allowed for timely filed and paid returns. It is not allowed on a delinquent return. The deduction reduces the overall amount of sales tax that must be remitted. Other common references to this deduction are: Collection Credit, Early Payment Credit, and/or Early Filing Discount.
Voluntary Disclosure allows a tax non-filer with potential liability in a single or multiple U.S. states (including the District of Columbia) to negotiate a settlement agreement regarding back sales or use tax liability on favorable terms despite being non-compliant.