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American Sales and
Use Taxes
 
     
  In the United States, 45 states and thousands of local jurisdictions impose sales taxes on the retail sale of goods and services. Sales taxes directly increase the cost to consumers purchasing a vendor’s goods or services, in many cases adding as much as 7 to 9% to the cost of a transaction. And, while the consumer usually is responsible for paying these taxes, the vendor has the administrative responsibility for collecting the taxes and remitting the collections to state and local taxing authorities. Complying with these requirements can be expensive and time consuming.
     
   
     
 

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.

 
     
   
     

In addition, customized computer software can be treated as exempt, while prewritten software may be taxable. And information provided by electronic impulse may be nontaxable even though the same information provided in paper format or loaded on to a cd will be taxable. In these and other cases, the classification of an item may not be apparent and therefore requires the assistance of a state tax professional and, in some cases, a ruling from a state regarding its interpretation of the state’s laws.

C. Characterization of the sale
In general, sales are nontaxable if the item is sold to a manufacturer for manufacturing purposes or to any other business for resale. However, obtaining confidence that such characterizations apply can be difficult when, for example, items are used or consumed in a manufacturing or processing activity without becoming an identifiable component part of the end product. The states provide many similar exemptions, all of which are subject to interpretation. Therefore, obtaining professional guidance regarding qualification for these exemptions is recommended.

Conclusion
This Alert provides an introduction to American state and local sales and use taxes. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or 312-281-1111.

 
 

Previous issues of the State Tax Alert Newsletter are available at: www.statetaxalert.us/archive

 
 
*David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.