Branding Beat - Cut Through the Noise

Why Sales Tax Is So $&!@ing Taxing

Sales tax.

I know, I know, I did this to you last spring, too! But it’s not my fault that Tax Day happens each year around this time and makes posts like this relevant. Trust me, I had no say in the matter.

If most of us had our say, taxes wouldn’t be an issue we dealt with at all, especially when it comes to sales tax. Why? Well, for one, because we often like to hold on to our money. Sales tax is an especially tough one to avoid, unless you live in one of the five U.S. states that don’t impose a sales tax or you do all of your shopping online (and even that’s not a guarantee—more on that later).

If you’re a middleman between a manufacturer and a customer, there might be tax implications for you…

But there’s another reason that people hate talking about sales tax, and it’s a reason that resonates with business owners as well as consumers: sales tax can be a pain to figure out. Seriously, did you know that there are three different kinds of sales tax, and not every state uses the same one? And did you ever wonder what happens in an industry like the promotional product industry, where products move from a supplier to a distributor—from business to business—before they ever reach the end consumer?

Well, get ready to learn! Keep in mind that what follows is not actual legal advice. We here at QLP are not accountants, attorneys, or anything other than a bunch of Internet-happy nerds out to start a discussion. But whether you’re an entrepreneur who wants to do business the right way or a consumer who’s curious about where your money goes, you’re about to get a primer on the wild and wooly world of sales tax.

Yeah, you can totally grab a coffee. I’ll wait.

All of the Definitions

In the middle of all of that stimulating talk of sales tax, there was probably one part that made you scratch your head a little bit: the part about there being three different kinds.

“The heck?” you might have said. “What do you mean I pay three different sales taxes? Gimme my money!”

Don’t worry. For starters, I don’t have your money. Additionally, it’s not that you, as a consumer, are paying three different kinds of sales tax when you go to the store (unless you buy an item like cigarettes, which lawmakers often heap additional taxes onto). Instead, U.S. tax law allows state governments to collect taxes on retail sales three different ways, hence, the three different kinds of tax.

So what are the three different kinds of sales tax? So glad you asked:

  1. Vendor Privilege Tax. The idea here is that being able to sell goods is a privilege for a business, and that privilege (and the business) is being taxed. However! Retail businesses can either absorb the tax themselves or pass them along to customers, to be paid at the time of purchase
  2. Consumer Excise Tax. The idea here is that buying goods is a privilege, so the consumer is shouldering the responsibility for paying the tax on a retail transaction. Sad to say, retail businesses can’t absorb this form of sales tax. The buyer has to pay! This is the most common form of sales tax across the U.S.
  3. Retail Transaction Tax. The idea here is one of a big ol’ chain reaction. The end consumer is paying the tax, but the government then taxes the business, so the retail business is a huge middle man. This looks just like a consumer excise tax to the average buyer, who still has to cough up money.

There are benefits to each kind of tax. A state with a vendor privilege tax where the businesses themselves choose to pay the tax can look like a mighty nice place for a consumer to go on a spending spree. Meanwhile, a state with a consumer excise tax, where the customers are paying the tax, can look like quite the business-friendly place for a retailer to set up shop.

Whatever the advantage, it’s the state law that determines which system is used. And according to U.S. tax law, the state where the goods are delivered to a customer is the state that gets the tax paid to it.

This is all fine and good for brick and mortar stores. The store is located in a state; that state is the one that collects the sales tax.

What about online sellers, like your very own Quality Logo Products®? When customers live in different states from the company that’s selling them the goods, how does that online seller know which tax system is in place and what to charge?

Wow, you’re just a glutton for punishment, aren’t you?

The Obstacles of Online Selling

If you’re at all into tax law (and who isn’t?), then you’ve probably heard of a 1992 U.S. Supreme Court case called Quill Corp. v. North Dakota.

Quill is the case that said that, in order for a state to collect sales tax from a business, that business has to have a physical presence, or nexus, within that state’s borders. Quill is the reason that, until recent legal changes, residents of states like Illinois didn’t have to pay sales tax when shopping on Amazon.com. Without a physical distribution center or anything like that located in Illinois, Amazon wasn’t subjected to Illinois sales taxes.

Of course, there is a concept called use tax. Use tax is defined as

a tax that’s placed on retail goods in states where a sales tax hasn’t been charged, or when a consumer buys a product from a seller in a state with a lower sales tax rate than the consumer’s home state

As Daniel Petri, Esq., an attorney with the Tax Defense Network, says, “Use tax will normally apply in the place of sales tax when the purchaser is buying a good from another state which will be used in the purchaser’s home state (as opposed to the state of the seller).” Ugh! At least, for the sake of the seller, the responsibility for paying use tax usually falls on the buyer.

When products move from business to business before they ever reach the consumer, who pays tax?

All of this, of course, is changing thanks to proposed legislation like the Marketplace Fairness Act, which goes beyond the scope of this post. For now, the concept of the nexus, or hub of business, still influences how sales tax is applied. And if a retailer has a nexus in the same state as its customer, then that retailer is collecting tax from that customer.

Which leads us to the next logical question: what constitutes a nexus? Why, darn near anything can qualify as an extension of a seller’s business, including:

  • Leasing a warehouse in another state
  • Having a telecommuting employee work from another state
  • Contracting with a manufacturer in another state

That last point is where it gets really tricky, especially if you’re in the promotional products industry. As you may or may not know, QLP is a distributor. We contract with suppliers and manufacturers to get the products our customers order.

The research I did for this post admittedly gets a little fuzzy; as I declared above, I, just like the other people here at QLP, am not a tax professional. But here’s the takeaway from what I learned: if you’re a business owner and, like a promotional products distributor, are a middleman between a manufacturer and a customer, there might be tax implications for you if your manufacturer and your customer are in the same state. Remember: it’s all about the nexus, baby! Well, and about the benjamins, too. That’ll never change.

Luckily, online business owners do have some avenues of recourse available to make sure they’re not being unfairly taxed in such a situation. You might, for example, want to look into something called a multijurisdictional resale certificate, which can help you deal with tax obligations for states in which your suppliers are located but you aren’t.

Or, even better, you can always get a checkup with a tax professional. That’s the far safer course of action. Heck, it’s what I did, and I’m just writing a blog post.

Handling Sales Tax Like a Pro

“No matter where you sell your products, neglecting to handle your taxes properly can create substantial problems for your business,” says Daniel Petri, Esq. He isn’t kidding. You’ve seen Stranger than Fiction, right?

“If you’re selling to customers in other states, consider what sales tax obligations you may face.” – Tax Defense Network

Jonathan Barsade, CEO of Exactor, a company that helps businesses figure out their sales tax obligations, echoes this sentiment, starting with learning the distinctions among the three different types of sales tax. “Each of these taxes is imposed under different circumstances,” he explains. “We have seen situations where one applied one of the taxes instead of the other, resulting in the return being rejected, and fines and penalties imposed.

“It is even more critical for online retailers, who are often times sending their merchandise across state lines,” Barsade continues. “The distinction then gets confusing, because traditionally an out of state remote seller will typically file under the use tax category, however some states will classify the sale as a standard sales tax, applying use taxes to purchases only.”

So what can a bewildered seller do? Becky Korn, the social media analyst for Tax Defense Network, shared some helpful advice:

  • Make sure you closely follow your state’s sales tax guidelines. These can vary greatly, depending on where you live in the country.
  • If you’re selling to customers in other states, consider what sales tax obligations you may face.
  • Think about investing in shopping cart software for your online business endeavors. This software can calculate associated sales tax with purchases made by customers around the country.
  • You will benefit greatly from the services of a Certified Public Accountant, who can find any gaps in how you’re handling and paying sales tax.

In short, use this handy guide from QLP as a sign to point you on your way… and then make your way to the pros. Maybe grab some coffee on the way.

Has sales tax been a tricky point for your business? Customers, does knowing about sales tax affect your shopping decisions? Let us know in the comments below!

expand your brand



Bubba

Bubba is the Quality Logo Products mascot. He may have started out as "just a stress ball," but he's come a long way since the company's launch in 2003. Bubba has been immortalized in numerous vector artwork designs for internal and external promotions, and you can see him change outfits on the Quality Logo Products homepage whenever a holiday rolls around. Oh, and he thinks pants are for the birds. You can connect with Bubba on

Comments

  1. T2

    Is the Tax Defense Network, a team of intergalactic heroes, traveling from world to world righting wrongs, and defending tax law?

    • Sheila Johnson

      Possibly, but I didn’t see anyone in costume on their website, so I can’t say for sure.

  2. Rondell Caraos

    Tisk Tisk Tisk… I mean Tax Tax Tax! Nobody really likes to pay taxes but it is the law and there is no way really around it. It is what it is! This article is great but I could read it ten times and still be confused! Each state has it’s own tax percentage and sometimes different counties in that state have a different percentage! It is sooo confusing! Califorinia alone could be a whole blog all by itself! In a nutshell, I always tell my clients that there will be sales tax if you will be shipping the material to Illinois where we are located or if you are shipping to the same state where the factory is located. The awesome thing is that here at QLP, we figure all that our for you so you don’t have to. California is only the tricky one where the tax percentages are completely different statewide… so that is the only state that really confuses me. I’m sure if you live in Cali, you know what I’m talking about because I’m sure you get charged tax all the time! But, if you are Tax Exempt… just send us a copy of your tax Exempt Letter and we will be sure to add it to your Order so you do not get charged any tax. I had no idea that there were three different types of Sales Tax… but now I do. Thanks! My father is a CPA and he always wanted me to become an accountant but to be very honest… I took a course in college and all it did was give me a headache! This is one of those topics that no matter how much I study it… I will never really understand how it works. Great article though! 🙂

  3. Ashley Hoban

    I would love to live in a state that didn’t impose a sales tax. That way, my fast food burgers actually cost $1 like the commercials say, as opposed to $1.09. It has always been a pet peeve of mine. Is that me being cheap? Totally. But every dollar is important, especially from a business standpoint. And stretching each dollar to its maximum return potential is integral to a healthy business.

    As for the healthy consumer in me.. let’s just say I’m working on my summer diet, and it doesn’t involve Wendy’s. I promise.

    Anyway, what I said about a healthy business is no secret. Instead, what seems to be a secret is all this hidden information regarding tax laws. You have to admire the circles your brain runs when trying to determine online sales tax. Now, laws are always changing to fairly accommodate online sales since it is such a huge part of business, especially here at QLP. It’s a good thing Sheila is around to clean it up for us.

    There’s lots of solid information in this I hadn’t known about previously. There’s even stuff I remember looking at last year thinking, wow!, only to completely forget until reading the link to last year’s post. That’s why I am all for this becoming an annual recurrence.

    U.S. Tax Law, as the article suggests, is so dreadfully long and multifaceted that it would be impossible for any average individual to remember. In that sense, I think it’s an awesome reminder to post this article as it is a necessity to jog the memory every now and then. I know I need it.

  4. Angie

    Wouldn’t it be easier if there was one flat sales tax used nation wide? I understand that the money you pay in taxes goes many places. In addition to paying the salaries of government workers, tax dollars also help support community services, such as police and firefighters. They also help fund programs that may not exist without the tax dollars. Why can some states keep their heads above water, without the sales tax, and other states tax you to death? Where do they get the dollars to pay for services and programs?

    • Kelly Bird

      Great questions Angie! There are some states that do so well without charging sales tax and even bigger than that are other countries that are doing so well they can afford to offer their citizens free education and healthcare and pension plans for people that work half the amount of time that Americans do. If you ask me our whole country has their priorities wrong. We need to work less and pay less – better life balance. I’m definitely living in the wrong country for that…if only I could convince all of my friends and family to move with me…and remote in to work. 🙂

Leave a Comment

Copyright 2003 - 2018 Quality Logo Products, Inc., Registration No. TX7-524-201. All Rights Reserved.