(We are assuming your business operations are in North Dakota therefore specific examples within this blog may be different based on the tax regulations in your state.)
We are sure you have heard of both sales tax and use tax. But, do you know how they’re different?
SALES TAX is typically imposed on the sales price of a good or service (if taxable) at the time of the sale. The purchaser pays the sales tax and the seller remits the sales tax. In addition, sales tax only applies to retail transactions; wholesale transactions are purchased tax exempt. This is the type of tax most of you are acquainted with already.
USE TAX, on the other hand, is typically imposed on the use or consumption of a good or service (if taxable). The purchaser pays and remits the sales tax.
Here are a few scenarios to help explain this further (note, these are just examples, not an all-inclusive listing). You’re welcome.
Scenario One: If you purchase an item for wholesale (meaning you purchased it tax exempt) and use it personally or within your business operations.
Generally, the end user of the item is responsible for paying tax. The definition of an end user is not all that simple (but then again, when is tax ever simple?). For example, let’s say you’re in the business of selling flooring and your customers can purchase the flooring in one of two ways:
- The customer will purchase the flooring only.
- The customer will purchase the flooring and have you install the flooring.
In both cases, you, as the retailer, purchase the flooring at wholesale. The end user in purchase option one is simple, your customer. Therefore, your invoice to the customer would include the sales price of the flooring and itemized line for sales tax. In purchase option two, you are the end user. Now we know what you’re thinking. My customer is getting the flooring not me. However, once you put on the “contractor hat” and are installing real property (that’s not always simple to determine either), you become the end user and you must pay the tax.
So how does that work?
- Calculate the tax on the materials that were purchased tax exempt, like the flooring and used in the installation. Remember to calculate the sales tax using the tax rates for the jurisdiction in which you used the materials as opposed to where you received the material (these could be the same).
- Include the use tax on your sales tax return (there is even a line for the state portion on the return; it’s been there a long time).
- Invoice your customer for the total price of the flooring installed. Do not include an itemized line for sales or use tax. Make sure you specifically denote that it was installed on the invoice (this will be handy in the case of a sales tax audit).
Want another example? Let’s say you sell pens in your retail store (you’re the owner). The pens are generally sold to your customers so you charge sales tax at the point of sale. However, today your pen broke so you run over to the aisle that houses the pens and grab one. You let accounting know that you took a pen for business use (because if it were taken for personal use, that would need to be accounted for differently). Accounting does an inventory adjustment to decrease the inventory and increase the office supplies expense for the cost of the pen. You’re good to go, right? Nope. Remember that you need to account for, and pay the use tax, on the pen.
Scenario Two: If you use an item in a tax jurisdiction that is higher than the tax jurisdiction in which you purchased the item.
You guessed it … you need to pay the difference.
However, it works both ways. If you use the item in a tax jurisdiction that is lower, you can request a refund from the state. For example, your business is in Fargo, North Dakota which has a tax rate of 7.50%. You purchase a piece of equipment from a dealer in Moorhead, Minnesota which has a tax rate of 6.875% and bring it back to Fargo, North Dakota to be used. You would be responsible to pay and remit use tax in the amount of 0.625% of the purchase price. Don’t forget that in North Dakota there a local maximum tax rates. For more information, check out our blog.
So what’s your takeaway? Often, sales and use tax are thought to be the same thing. They’re not. Taxable transactions will always include either sales tax or use tax, but never both.
Confused much? Don’t worry. Sales and use tax is not a simple matter. We have full-time people that are SALT (State and Local Tax) experts. It’s what they deal with day in and day out. There are also great resources out there as well. For instance, you can check out your state’s website for guidelines and publications. As always if you have questions, we would love to help.