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Pay PalSales tax or use tax? What’s the difference?

Sales tax is imposed on retail transactions and applies to all retail sales of tangible personal property, and in some states services, in the state.

The use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Consumer’s use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales.

Sales tax and use tax generally apply to most leases of tangible personal property. The sales tax and the use tax are “mutually exclusive”, which means either sales tax or use tax applies to a single transaction, but not both. Sales tax or use tax in Arkansas

Which states matter?

There are 45 states (including the District of Columbia) which impose a general sales tax. The five states without general sales taxes are Alaska, Delaware, Montana, New Hampshire and Oregon. Most states also impose a variety of local sales taxes including county, city, and transit taxes.

What the heck is nexus?

For the purpose of sales tax and use tax, the definition of nexus could be described as the presence or connection a business has, and is establishing.

Most businesses advertise, using a variety of mediums, often including aggressive Internet campaigns. The business might offer an invitational “for more information” sign-up widget on their website to enable the business to offer their product or services to a wider, far-reaching group of consumers. Advertising and online sales blur the line between having and not having nexus, or a sales tax presence. So-called “click-through nexus” and “affiliate nexus” laws are changing and in all probability will continue to change with the Internet. More sales tax info?

Your business has nexus and “anti-success.”

If your company has a presence in the state of delivery, your company has established nexus, and specifically a tax nexus, and will be required to register to collect sales tax on all taxable items regardless of method of order placement. Whether the sale is made over the Internet or through traditional means, if your company has nexus in the state to which the product is being shipped, sales tax should be billed and collected.

If your business sells over the Internet, using a fulfillment house to fulfill the orders, you may have nexus for sales tax purposes in the state where the fulfillment house is located. If you have affiliated with another business, especially through a third party agreement, for combined product and/or services marketing, you may have established nexus with other states through this affiliation.  The presence of inventory in a state also may create nexus for not only sales tax but also for income tax purposes.

Anti-success?

Yep. Your business has achieved nexus in states around your home state and in some far-away states whose consumers have found out just how great your business really is! That is success. Congratulations! Anti-success is the mind-boggling realization that your success is now causing you some serious sales tax issues that you didn’t even know existed and which are constantly changing! Congratulations, you know me and my phone number is 479-478-6831.

Your business has not established nexus in other states.

If you are a retailer and have not established nexus in a state, you are not required to collect and remit sales tax on sales in that state. There is no sales tax obligation for the retailer if it has not established nexus in a state. However,  if a retailer does collect sales tax in a state in which it is not registered to do so, that constitutes an illegal activity. Do not collect sales tax for sales in states where you have not established nexus.

In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax. In this case, the tax is known as a “use tax.” Per DFA Regulation GR-5(C), an out-of-state seller “may” be required to collect sales tax, but, if not, then the customer is responsible for paying a compensating use tax.

Still confused?

Sales tax, use tax, consumer use tax, Arkansas’ consumer use tax and Arkansas’ gross receipt tax. All the same? It depends. Where is the residence of the business owner? What is the marketing strategy, both physical and Internet, of the business? In which states are your consumers located?

Now what?

We need to talk if you’ve a business owner

  • selling taxable items across a state line,
  • servicing clients, delivering goods and/or services,
  • your place of residence is in another state,
  • you use a fulfillment house or warehouse or have a mobile storage facility,
  • advertise community involvement across a state line, or
  • have hired a new, national marketing service (particularly one promoting online advertising.

Let’s talk! 479-478-6831

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