What is sales tax?
Sales tax is a tax imposed by state when a business sells any product / service to the customer.
What is use tax?
Use tax is a tax imposed by state when a business purchases any product or service from vendor and vendor is not subject to collect sales tax.
Levy of sales and use tax
In US, sales and use tax is to be paid at state level. Once nexus is established with state, businesses need to register with state and collect sales tax on invoices. The collected amount is to be deposited with states on periodical basis.
Sales tax nexus
If you’re selling products or providing services, sales tax may apply once revenue is generated from customers.
Once revenue is generated, sales tax registration is required only if business has nexus with state.
What is nexus?
- Physical nexus: A physical presence in a state, like an office, sales agent, or employees.
- Economic nexus: This is determined by revenue thresholds that vary by state. For example, generating $100,000 in revenue or completing 200+ transactions in a state can establish economic nexus.
Taxability of services & products
Once nexus is established, businesses must determine if the products or services are taxable. If taxable, businesses need to collect sales tax on invoices.
Resale certificates
Resale refers to buying products for the purpose of selling them without modification.
In these cases, you don’t need to charge sales tax if buyer provides a resale certificate.
When does use tax apply?
Use tax applies when you buy products or services, and the vendor doesn't charge sales tax. As the buyer, it’s your responsibility to assess the taxability and pay the use tax to the respective state.