How To Determine Taxability for Business Purchases

If you are the person in your company that's responsible for remitting sales and use tax returns, it can seem almost impossible to wade through the rules and loopholes of the tax code.  To make matters worse, each state varies in what it considers taxable and non-taxable purchases.  There are a few guidelines that are consistent from state to state, however.  Becoming familiar with these guidelines can help simplify the process of submitting that return!

  1. Casual sales are usually tax-exempt.  This means that if you sell a homemade pie to your neighbor down the street, you do not have to collect sales tax for the sale.  However, if you regularly sell homemade pies, this would mean that you are running a business, not just casually selling items.  In this case, you would be required to collect and remit sales tax to your state government.  In general, a casual sale means that it takes place less than three times per calendar year.
  2. Industrial sales are tax-exempt.  If your company processes a product, then resells it in a different form, you are considered a manufacturer.  Anything that is directly used in the process of manufacturing is considered tax-exempt in most states.  This doesn't mean that everything used in your business is tax-exempt - just the products that actually are used in the manufacture of your finished goods.  For example, if you manufacture tires, all of the chemicals and materials used to produce the tires are tax-exempt, but the paper used in the copy machine to print invoices to your customers is not.
  3. Some computer sales may be tax-exempt.  In some states, computers and computer accessories are considered tax-exempt if they are used for business purposes.  This law varies from state to state, so be sure to check your local tax code before claiming this exemption.  Most states do consider all computers to be tax-exempt if they are used directly in the manufacture of finished goods.  This is an important point to consider, even if you think a computer isn't used in manufacturing at your company.  For instance, if you run a screen-printing business which utilizes several workstations that are connected to a main server to produce your designs, not only are the workstations exempt, but so is the server.
  4. Some services may be tax-exempt.  Each state differs in what it considers a tax-exempt service.  In your state's sales and use tax code, you'll probably find a "laundry list" of services that are taxable.  If the service which is being rendered isn't on this list, then it is tax-exempt. 
  5. You are required to collect sales and use tax on taxable purchases, but not necessarily local option taxes.  Sales tax is the tax that is administered by your state government.  Use tax is the tax that is collected by states outside of your home state.  They are, in essence, the same tax, with different names.  You will be expected to remit sales tax for any purchases made in the state in which your business is located to your state government.  For sales made to customers in other states, you will need to remit use tax to the appropriate state government agency.  For example, if your business is located in Montana, and you have branches in New Mexico and Colorado, you will have to file a sales tax return in Montana and a use tax return in New Mexico and Colorado.  If this hasn't confused you yet, you'll also need to make a decision on local-option taxes.  These are taxes which are imposed by county and city governments, but are payable to the state, which then distributes them to the appropriate local government agency.  There isn't, in most cases, a local-option use tax.  This means that in the above example, you would be required to remit any applicable local-option taxes in Montana, New Mexico and Colorado, but not in any other states.
  6. Some food items may be tax-exempt.  Many states consider the sale of certain foods to be tax-exempt.  Usually, grocery items are tax-exempt, but commercially-prepared foods such as soda pop, gum and candy is not.  Again, consult your state tax code for specific guidelines.

These are the basic rules which are generally consistent from state to state.  In 2000, forty-two of the forty-five states that have sales and use tax laws banded together to form the Streamlined Sales Tax Project.  The goal of this project was to simplify the collection of sales and use taxes and make the rules more uniform across the board. As with any undertaking of this size, it continues to be a work-in-progress.  For more information about this project, consult the Sales Tax Project website. 

 

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