Sales Tax is an area where the concept of States as ‘Laboratories of Democracy” comes into one of its most frustrating forms. 50 states have the option of making use of a Sales Tax (46 exercise that option) and there is no real requirement for them to behave in any semblance of common order. This presents a series of Burdens and Risks.
The burdens of a Sales Tax are obvious. They include monetary costs for purchasing an item and a compliance cost for making sure everything is handled appropriately. The risks are not as obvious. The first, is a risk associated with buyers in certain states. 16 states will charge both the buyer and the seller any fines and interest in the event that sales tax was handled improperly. This is one reason it is important to select reputable partners, no one wants to be left open to penalties for transactions they assumed were handled by someone else.
The second risk, is that if your purchasing department and the seller do not structure the purchase correctly, the transaction can happen in a jurisdiction you do not expect. For example, let us assume the following:
1. The Customer is in State A.
2. The Seller is in State B.
3. The Customer is Tax Exempt in State A, but not in State B.
4. The customer wants to use their account with a common carrier (UPS, FedEX, etc.)
The customer may feel that because they are Tax Exempt in State A, they do not have to pay Sales Tax. The seller may agree and not charge it. However, many states consider a transaction to be complete where the transfer happens. As the common carrier picking up the item on the customer’s account is considered their agent, transfer happens at the dock in State B. The customer may now owe Sales Tax in State B. This situation can be compounded by the fact that if there is no reciprocity between State A and State B, the customer may owe the full tax burden to BOTH states. If this occurs between two high tax states, it could increase the cost of the transaction by 20%.
As you can see, being Tax Exempt in one state, does not mean you can ignore how you structure a deal with your suppliers. Fortunately, there are ways to handle the problem, so that you can continue to do business as needed, but you must be cognizant of the tax laws in every state you are buying from.
This problem can even exist for customers that know in advance they have to pay Sales Tax. Even with reciprocity, if the Customer’s State Sales Tax is higher than the Seller’s and the transaction takes place in the Seller’s State, the difference between the two will have to be paid to the Customer’s State. This obviously doubles the compliance burden.
Whether you are Tax Exempt or must pay Sales Tax, it is important to make sure that your purchasing department understands the impact of their deal structures. If you want to use business practices that would normally adversely affect your Tax Burden, you will want to make sure you actively implement measures to return you to your normal Tax State. If you do not, it is possible that you could find yourself in a difficult situation down the road.
This is just another example of why the selection of appropriate partners is so vital to the success of a business.
–John Gallagher, Operations Manager