When you run a business, you have to focus on countless moving parts, and with so many responsibilities, it can be hard to stay on top of everything. But when it comes to taxes, you have to stay on top of things or you risk becoming incompliant. That can lead to fines, penalties, and even loss of your business license.
At DHJJ, we know that the various elements of state and local taxes can be confusing, and we work hard to help our clients understand their obligations and stay compliant. Wondering which taxes your business needs to pay? The answer varies depending on the situation, but to help you out, here is a guide to sales tax vs use tax.
What Is Sales Tax?
Sales tax is a consumption tax applied to goods and/or services. It is a percentage of the sale amount, and depending on the area, it may include state, county, and municipal sales tax as well as special district taxes.
Business owners collect sales tax based on the laws in their local areas, and then, they remit the taxes to their state revenue agencies. Sales tax rates, taxable goods and services, and filing requirements vary from state to state, and in fact, five states do not have sales tax.
What Is Use Tax?
Use tax applies to purchases when sales tax has not been assessed. It does not apply in situations where sales tax has already been applied. Use tax complements sales tax, and it helps to ensure that consumers pay sales tax when purchasing items outside of their tax jurisdiction.
For example, if someone purchases something from another state, they may need to pay use tax to the revenue agency in their state. Consumer use tax is paid by the consumer to the revenue agency — for example, if you live in Cook County and you purchase a vehicle in another area, you must remit use tax for the purchase to Cook County.
Vendor or retailer use tax applies when a vendor or retailer makes a taxable purchase outside of their jurisdiction, and then, they must remit the tax to the taxing authority. Generally, they can pay use tax when they file their sales tax return.
What is the Difference Between Sales and Use Tax?
Technically, sales tax only applies in cases where the buyer and the seller are in the same area. This is called an intrastate transaction. If a seller collects consumption tax from a buyer in a different area, that is referred to as use tax.
Sales and use tax rates vary from area to area, but in the same area, these two taxes are the same rate. For example, the sales tax rate in Chicago is 10.25%, but it is only 7.75% in Naperville. However, in Chicago, both the sales and use tax rate is 10.25%, and in Naperville, both sales and use tax are also 7.75%.
In both of the above examples, the sales and use tax rate includes several different sales taxes. The Chicago sales tax rate includes Illinois state sales tax, Cook County sales tax, and Chicago city sales tax. In contrast, shoppers in Naperville pay a 7% state sales tax and a 0.75% city sales tax.
Sometimes, different products or services have different rates. In Naperville, for example, there is a 1% additional tax on food for immediate consumption, meaning that diners pay 8.75% sales tax on food from restaurants and other dining establishments.
What Is Nexus?
Nexus refers to a connection between a seller and a state, and if the seller has a certain connection, they must collect sales tax. They may also need to pay use tax as applicable for the situation.
When you run a business that sells taxable goods or services, you need to ensure that you understand the tax rules in your area and stay compliant. If you offer remote or online sales, then you also need to understand the rules in the jurisdiction of your buyers.
Physical nexus applies when you have a physical connection to a state. For example, if you run a brick-and-mortar business, you have a physical nexus in that location.
Depending on the laws in that area, you may also have a physical nexus based on having offices, mailing addresses, employees, contractors, or affiliates in a certain area. Storing inventory or maintaining warehouses can also create physical nexus. The exact rules vary from area to area.
Like physical nexus, economic nexus rules also vary from state to state. In most cases, you have economic nexus if you exceed a certain number of transactions or a volume of sales in a specific area.
Once that happens, you must collect and remit sales tax returns. The majority of states with sales tax created economic nexus rules after the Supreme Court’s ruling in South Dakota Vs. Wayfair opened the door for states to collect sales tax on sales from remote or online vendors.
DHJJ Can Help with Sales Tax & Use Tax
Running a successful business requires you to wear a lot of different hats. You have to understand your industry, your product or service, and your target market inside and out. On top of that, you also have to ensure that you meet your tax obligations.
To ensure you thrive, you need financial planning and business accounting services tailored to your unique needs. We offer state and local tax planning as well as business advisory and audit services.
Need help with tax compliance? Want to ensure that you’re optimizing your tax strategy for the short and long haul? Then, leverage the expertise of our experts.
To learn more about our accounting and advisory services, contact us today.