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INTRODUCTION
THe intent of this publication is to give
the newcomer to the
mail order field an overview of state sales and use tax laws
as they affect a small mail order business. As of 1988, 45
states and the District of Columbia levy sales and use taxes.
In researching this project, I was unable to find any
publication that provided comprehensive information on sales
and use taxes in all states. The information we present is
based on limited research of laws in the State of Maryland,
and several other northeastern states. Yet fundamental rules
as pertaining to sales and use taxes appear to be fairly
similar throughout the country. No information is this
overview is to be construed as presentation of legal or
tax advice or advice on any laws in any state or municipality
in the U.S. Such advice and information should always be
obtained from qualified attorneys. CPAs or the appropriate
state or city sales tax office.
Without question, the two tasks that I
dislike most are reading
and writing about insurance or taxes. I had, therefore, put this
project off for quite some time. What eventually prompted me to
write it anyhow was I saw a definite need, often based on a lack
of understanding about sales and use tax matters by newcomers to
the mail order field. I promise you this will be as short and
painless as the subject allows.
FACTS ABOUT STATE SALES AND USE TAX LAWS
1. I List this fact first since it seems
to represent the
biggest misunderstanding: Sales tax is levied on intra-state
sales only..
Sales taxes are no levied in interstate
sales, except as shown
below.. This simply means that the ABC Mail Order company
located in Los Angeles, CA when selling an item to John Doe
who lives in Denver, CO, does not charge him sales tax.
The ABC Mail Order Co only needs to levy sales tax to a
resident of the State of California. This rule is based
on a Supreme Court decision of 1967 in which the Court
decided that state sales cannot be levied on sales made
to residents of another state. Congress did, however,
amend this law earlier this year, and it now requires
those mail order companies which have annual volumes in
excess of $2.5 million dollars to collect sales tax on
interstate sales. It is expected that the 2.5 million
dollar figure will be lowered in the next several years,
but it is unlikely that small or medium mail order
companies will be required to charge sales tax on interstate
sales in the foreseeable future.
2. State sales taxes are levied on retail
sales only. It is
the person who uses the product who must pay the taxes, not
the various layers of companies which are between the
manufacturer and the user.
3. You, the company, charge the tax and
hold it in trust for
your state until your next sales tax filing.
4. I am often asked:"since I am just
starting out and just a
small company can I just forget about charging the tax?" I
definitely do not recommend such a course. If you do you are
violating an important laws of your state and are subject to
the consequences which can be severe. remember one of the
most important premises of tax collection policy in this
country is for the Federated State and local governments
to require strict adherence. If they let one company, no
matter how small, get away with non-compliance, the "Tax
Collecting Structure" is adversely affected.
5. Along with the above question here is
another equally
popular one: "Since I am quite small, can I just pay it for
my customer and not show it on the order form? The information
I have been able to come up with is that all states feel
very strongly about this point.. IT IS DEFINITELY, MOST
EMPHATICALLY A NO-NO. I was told that any company who follows
this practice is subject to (A)paying all taxes again though
they may have been paid before, and(B) the company will be
subject to all appropriate fines, interest penalties and
punishment under the law. As the operator of a small mail
order business, you sometimes are subject to using the
promotional material that your suppliers provide you with;
many of the circulars do not have sales tax information and
you have a small problem. But it is very small because
(A) It is easy enough to fix a circular; a little typewriter
whitener, your local (or out-of-town) printer, typesetter,
desktop publisher it is always a good practice to include
your own order form which contains the sales tax information
for your state. You will get more orders that way since some
of your customers want to keep the promotional material you
send them intact until they receive the goods. So an order
form which costs less then 3 cents a piece is a good marketing
tool and it will keep you out of trouble with your state
authorities.
6. It is very easy to obtain the proper
information and then
to comply with it. I know when starting a business these small
matters can often appear to be overwhelming, but almost always
they just appear that way.. So, just take one step at a time.
No matter where you live in this country, if your state has
a sales tax, there will be an office nearby that will be
glad to give you information. Just ask the telephone operator
for the listing of the local state sales tax office. You will
receive information in a few days. Generally there will be
no fees to pay and forms are easy to fill out... In a few
days or a couple of weeks, you will be issued a sales tax
license. Your state does not care if you operate your business
out of your home, garage, and office or warehouse location.
All the state wants is to collect taxes.
7. Most, but not all states have quarterly
filings. The sales
tax office will set you up on a schedule. If you live in one
of the less populous states and are just starting out, your
quarterly amount due will be very small and could be as little
as $1.. You still have to file and pay. If you operate in one
of the large states such as California, New York, Texas, etc..
you may do quite a bit of business in your own state.
8. Certain products and most services are
exempt from state
sales taxes. Since different states have different rules, it
is best to obtain the regulations for the state where your
business is located.
9. Penalties for non-compliance with state
sales tax laws vary,
but in general are quite strict. It is best not to take chances
and to strictly comply with the laws of your state.
10. Many cities throughout the country
levy sales taxes. Such
taxes are beyond the scope of this article. The principle and
basic rules of city sales taxes, however, are similar to those
of state sales taxes.
11. SALES TAX RESALE CERTIFICATES. Laws
may vary by state but
the principle is based on the premise that the sales tax is
only paid by the consumer or "end-user." Yet your supplier
is required by law to charge you the tax unless you can furnish
him with a Sales Tax Resale Certificate. Example: You sell a
series of reports both to customers inn your state and customers
in other states, and you have them reproduced at a local quick
print shop who charges you the appropriate sales tax.. Call
your local sales tax office to obtain an application for a
Tax Resale Certificate. As soon as you present it, your supplier
can cease levying the tax on you. As previously stated, the
reports you send to your out-of-state customer are not subject
to state sales tax, but the reports you sell to your in-state
customers are.
12. State use sales taxes are slightly
more complicated to
explain than sales taxes. A "use tax" generally applies
under
one or two circumstances : (A) You are buying certain quantities
of supplies wholesale and are reselling most of the product.
However, you are retaining part of the product for your own use
or consumption. You must estimate that portion which you use, and
pay the use tax on it.. (B) More commonly you are buying certain
suppliers for your own use and not for resale from an out-of
state supplier. You must pay the use tax on those items.. Some
common examples are: Office supplies, printing supplies, office
equipment, etc. Obtain specific information from your state. Use
tax rates are assessed at the same percentage rate as sales tax
rates. Items you buy out of state which you resell, such as books
or other products, are not subject to the use tax.
I strongly recommend that you obtain specific
information from
your local sales tax office and then adhere to all laws and
regulations of your state. The inconvenience of dealing with
those rules will be minor compared to the possible serious
consequences of non-compliance.
The last page of this article shows (1)
The sales and use tax
rates which were in effect on July 1, 1990, in those states and
the District of Columbia which levy sales and use taxes. Changes
may have occurred since that time.. (2) A sample ledger sheet
which may be one way you could record your sales taxes. If you
are audited, it is important that you be able to produce a
workable system that indicates you record sales taxes as a
routine procedure. (3) That portion of a sample order form which
shows the sales tax information.. Please note that almost all
states levy the sales tax on that amount which includes postage
charges.
State General Sales and Use Taxes,
1990
State Percent rate State Percent rate
Alabama 4 Missouri 4.225
Arizona 5 Nebraska 6
Kansas 4 Nevada 5.75-6
California 6-7 New Jersey 6
Colorado 3 New Mexico 4.75
Connecticut 8 New York 4.-8.25
D.C. 6 North Carolina 5
Florida 6 North Dakota 6.5-7.5
Georgia 4 Ohio 5
Hawaii 4 Oklahoma 4
Idaho 5 Pennsylvania 6
Illinois 6.25 Rhode Island 6
Indiana 5 South Carolina 5
Iowa 4 South Dakota 4
Kansas 6.25 Tennessee 5.5.
Kentucky 5 Texas 6
Louisiana 4 Utah 6.25
Maine 5 Vermont 4
Maryland 5 Virginia 4
Massachusetts 5 Washington 6.5
Michigan 4 West Virginia 6
Minnesota 6 Wisconsin 5
Mississippi 6 Wyoming 3
ORDER FORM
ORDER # PRICE
___________________________________________________
___________________________________________________
___________________________________________________
Subtotal for items
listed above _______________
Postage $2.00 minium...or
10% of order on orders over $20.00
_________________
Maryland residents: Add 5% of total (sales
tax)
_________________
Total amount enclosed
_________________
Name _____________________________________________
Address __________________________________________
City ______________ State _____ Zip_______________
(________)Check (____________) Money Order
ORDER NOW- IMMEDIATE DELIVERY
MONEY-BACK GUARANTEE
XYZ SALES CO.
P.O. Box 1000
Baltimore, MD 20907
