Taxation in the US comes in many different varieties. We have taxation on income, self-employment, gifts, and so on. When speaking in terms of the estate tax, we are discussing a tax imposed on a transfer of net assets, a transfer tax.
Different government bodies impose various types of taxes. Federal tax governs all US citizens or domiciled residents and encompasses all the different states found across the nation.
Each US state also has its own set of rules and regulations that apply to specific residents of that particular state.
Have you had any of these thoughts about your business’ sales tax or use tax obligations:
“I’m a service provider; I don’t need to collect and remit sales tax.”
“We were only in the state at a trade show for one week – we don’t have physical presence in the state, so we don’t have to collect sales tax.”
“I bought equipment for my company in another state, since they don’t have sales tax. I saved 6% by doing this!”
Sales and use taxes are a murky area with few clear-cut rules. As a result, you or your business may not be in compliance with states’ sales and use tax regulations.
Sales tax is a tax that is levied on the sale of goods or services. Unfortunately, states have differing definitions of what is included as a taxable good or service. A general rule of thumb is that the sale of tangible personal property (that is, physical assets that are movable) is taxable. The provision of services is generally not subject to sales tax unless a state has a regulation or law that specifically subjects the service to sales tax.
Businesses that establish nexus within a particular state may be required to meet certain tax compliance requirements even after they stop conducting business within that state. For instance, some states have implemented trailing sales tax nexus rules which require companies to collect sales tax even if they no longer have tax nexus.
Tax nexus can best be defined as the seller’s minimum level of physical presence within a state that permits a taxing authority to require them to register, collect and remit sales and use taxes. In determining whether an out-of-state seller needs to comply with tax nexus laws, it is appropriate to examine a combination of federal and state laws. Having said that, if de minimis activities are performed within a state that establishes only the “slightest presence” in a taxing jurisdiction, it is unlikely that the seller will need to register and collect sales tax in that area. If the company has more than a de minimis physical presence in the state, then sales tax registration and collection would likely be required. Most states characterize “doing business in their state” as regularly or systematically soliciting business either by employees, independent contractors, agents or other representatives or by distribution of catalogs or other advertising matter. It is important to know the rules in each state where your company conducts business.
Let us review the concept of how state taxes impact federal tax returns.
On New York State tax forms IT-201-I, or IT-150, or NYC-202(4), the taxpayer is subject to either individual or business income tax. However, on Schedule A or Schedule C of federal form 1040, the taxpayer may deduct state and local income taxes. Specifically, if the taxpayer elects to itemize deductions on Schedule A, state and local taxes would be included in the schedule. Please note though that the state taxes remitted during the year are generally not equal to the total amount due at the end of the tax year. Moreover, the taxpayer will end up either owing additional taxes or receiving a refund for taxes overpaid.