Businesses, therefore, seek classifications allowing their sales to be treated as nontaxable and, where possible, attempt to avoid the administrative complexity of filing tax reports in hundreds (if not thousands) of taxing jurisdictions. At the same time, a business that fails to collect sales tax from its customers on sales later determined to be taxable can itself be held liable for the taxes its customers should have paid. In many states, the vendor’s officers, directors and other responsible persons can be (and sometimes are) held personally liable for the vendor’s unpaid sales taxes.
For these reasons, sales tax planning is crucial for many businesses. Such planning can take a variety of forms, including but not limited to the following:
A. Controlling tax presence
Under the United States Constitution, a business is responsible for collecting a state’s sales taxes only when the business has a physical presence in the state, as might occur when the business has an employee, representative or location in the state. Businesses avoiding such a presence are not required to charge or collect the state’s tax. This often provides an advantage to Internet and direct mail businesses.
B. Characterization of the item sold
In general, sales taxes apply to sales of goods and specified services. Where possible, businesses seek to classify their sales as nontaxable. As an example, items classified for sales tax purposes as medicine or as a medical or prosthetic device may be exempt from sales taxes or taxed at reduced rates.