We use the term SALES TAX as a catch-all – we are referring to whatever tax a state imposes on retail sales. Sales taxes can be split into 3 categories:
- Seller privilege tax. This tax is imposed on retailers for the “privilege” of making retail sales in the state. Retailers often have the option of taking the hit (i.e. paying the tax out of their own pockets) or passing it on to their buyers
- Consumer tax. Consumer sales tax is levied on the person who makes the retail purchase in the state. In this case, sellers are pure collectors for the state, so they don’t have the option of absorbing the tax.
- Retail transaction tax. This tax is added to the retail sale transaction itself, with the liability for paying the tax falling on both parties. Sellers are responsible for collecting and paying the tax, buyers are responsible for paying the tax. Basically, this is a combination of the other two types, but it’s more similar to the consumer excise tax since sellers don’t have the option to take the hit themselves.
The majority of U.S. states have a consumer sales tax, where the buyer bears the legal burden of the tax, and the seller is obligated to collect it and pay it over to the state.
What are use taxes?
In theory, the state only has jurisdiction over its own borders. Therefore, a state cannot impose its sales tax on retail sales that are executed in other states. Since states can only tax transactions within their borders, this opens up a loophole: state residents could technically avoid paying sales tax by making their purchases outside the state (either by traveling or more likely these days by buying stuff on the web). To close this loophole, states with sales tax have the option of a “use” tax, which applies to the “use, storage, or other consumption” of TPP within the state (assuming the purchase of which would have been subject to sales tax had the transaction occurred within the state).
The loophole has also been closed by the U.S. Supreme Court decision in 2018 that allowed states to tax out-of-state sellers with no physical presence in the state.
Whether it’s called sales tax, gross receipts tax, or a privilege tax – it all means the same thing: a seller who is obligated to register in a state (because they have nexus), has a legal obligation to charge it. it is important that sellers understand their obligations and start charging whatever that state calls it when nexus is created.