The Sales Tax Cap

It’s time for a facelift. Last summer, we posted a blog about the North Dakota sales tax cap, and to this date, we still get tons of views on it. What does this mean? It’s a hot topic that’s important to business owners! So, we decided to bring it front and center again so you can get all the info you need without having to dig too far (we’re nice like that).

If you’re doing business in the state of North Dakota, there’s some important tax issues you need to know about: local sales tax cap and minimum tax.

There are multiple cities and counties in North Dakota, which means there are multiple local sales tax jurisdictions that have a max amount of sales tax you are responsible to pay – or, in other words, the refund cap. However, it’s not the vendor’s responsibility to cap the sales tax on your purchase.

The good news? You can submit a claim for a refund with the State!

So, how does all this cap stuff even work? Let’s look at an example:

Gary is working on a project, and bought $10,000 worth of lumber. He had the lumber delivered right to the job site – which is located in Fargo. He received a bill from the vendor, with the total being $10,750. This included sales tax at a rate of 7.5%, which was properly imposed.

Material Cost    $10,000.00

            Sales Tax                 750.00     

            Total                 $10,750.00

Gary went ahead and paid the bill for $10,750. However, in this case, the sales tax on the purchase is in excess of the maximum tax. This means Gary should apply for a refund. But how is the sales tax more?

Well…

The Fargo sales tax rate – which is the 7.5% that was applied to the purchase – is made up of three components:

State of North Dakota   5.0%

            City of Fargo                2.0%

            Cass County                  0.5%

The maximum tax for the City of Fargo is $50, while $12.50 is the maximum tax for Cass County (the State itself doesn’t have a maximum tax). In other words, the sales tax only applies to the first $2,500 of your purchase. Let’s recalculate Gary’s bill using the tax cap:

Material Cost    $10,000.00   

            Sales Tax               562.50

            Total                 $10,562.50

Confused about where the $562.50 came from? State tax = $500 ($10,000*5.0%), City tax = $50 ($2,500*2.0%), and County tax = $12.50 ($2,500*0.5%).

This means that our good friend Gary is eligible for a refund of $187.50 from the State of North Dakota – and who doesn’t love getting money back?

So how does Gary go about getting his refund?

Easy as cake (which Gary could definitely indulge in with his refund money)!

  1. Visit https://www.nd.gov/tax/salesanduse/forms/
  2. Under “Other Forms” click on “Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Follow the instructions to complete and send back

A few other things to keep in mind with maximum tax include:

  • The refund claim must be postmarked no later than three years from the date of the invoice. (This means if you weren’t aware of the cap, you can look back three years and see if you have any claims to submit!)
  • You need to include with the form a copy of all invoices covered by the claim.
  • The refund claim only applies on properly imposed sales tax – which means the sales tax needs to be right in order to claim a refund from the state.
  • The refund claim applies to a single transaction, not an item on a transaction or total purchases for a month.
  • Not all cities and counties impose a maximum tax. The claim for refund form has a table which outlines the cities and counties that impose this tax.

If you still have questions, let us know. We have tax people who can help make taxes a little less… taxing.

Sales Tax 101: Sales Tax versus Use Tax

(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:

  1. The customer will purchase the flooring only.
  2. 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?

  1. 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).
  2.  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).
  3. 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.

Sales Tax 101: North Dakota Cap

Are you doing business in North Dakota? Have you ever heard of a local sales tax cap or maximum tax?

In North Dakota, there are numerous local sales tax jurisdictions (we’re talking cities and counties here) that have a maximum amount of sales tax you are responsible to pay (a.k.a. refund cap). However, it is not the responsibility of the vendor to cap the sales tax on your purchase. So now you’re probably thinking, that’s just great. Good news is, you are able to submit a claim for refund with the State!

So how does the cap work? Let’s use an example:

Gerald purchased $10,000 in lumber for his project and had it deliver to the jobsite (located in Fargo). When he received the bill from the vendor it totaled $10,750 which included sales tax in the amount of 7.5% (which was properly imposed).

Materials                     $10,000.00

Sales Tax                                750.00

Total                              $10,750.00

Gerald went ahead and paid the vendor $10,750. However, the sales tax on this purchase is in excess of the maximum tax so Gerald should apply for a refund. How so?

The Fargo sales tax rate of 7.5% is made up of three components:

State of North Dakota          5.0%

City of Fargo                            2.0%

Cass County                             0.5%

Total                                            7.5%

The maximum taxes are $50 and $12.50 for the City of Fargo and Cass County, respectively (there is no maximum tax for the State). In other words, sales tax only applies to the first $2,500 of your purchase. Let’s recalculate the bill using the cap:

Materials                     $10,000.00

Sales Tax                                562.50

Total                              $10,562.50

State $500 ($10,000 * 5.0%), City $50 ($2,500 * 2.0%), and County $12.50 ($2,500 * 0.5%) = $562.50

That means Gerald is eligible for a refund of $187.50 from the State of North Dakota.

Awesome right? But how does Gerald get his refund:

It’s easy as 1, 2, 3…

  1.  Log-on to https://www.nd.gov/tax/salesanduse/forms/
  2. Under Other Forms click on Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Complete and send the form as instructed.

Here are a few other notes on maximum tax:

  •  The claim for refund must be postmarked no later than three years from the date of the invoice. (That’s right, if you weren’t aware of the cap, you can go back three years and submit a claim now!)
  • Copies of all invoices covered by the claim must be included with the form.
  • The claim for refund only applies on properly imposed sales tax (that’s right the sales tax needs to be right to claim a refund from the State).
  • The claim for refund applies to a single transaction (not an item on a transaction or total purchases for a month).
  • Not all cities and counties impose a maximum tax. The claim for refund form includes a table which outlines the cities and counties that impose a maximum tax.

Still have questions? We have people. Let us help you.