Sales & Use Tax:  How Much Do I Owe?

Sales and use tax is a complicated and confusing topic for many businesses. If a business resided and only conducted business within one state everything would be simple, right? Well maybe…, but the world of sales tax is just not this straightforward. Knowing only one state's rules and regulations is complicated enough. In the real world businesses can reside in one state, operate (or have Nexus) in multiple states, all the while, purchase in and owe sales or use tax in multiple states. Then we could add to that a business transacting business in a foreign country. Feeling confused already? Don't feel bad.

In this article we hope to answer some of the more commonly asked questions we have received regarding sales and use tax and to give you a basic understanding of some of the issues involved. Whether or not a particular transaction is taxable is determined by many factors, such as where the transaction has taken place, what is being bought or sold, what type of entity is involved (for-profit or not-for-profit). Keep in mind that there are exceptions to almost any rule, and because we operate in a unique situation living in a tri-state area, there often are times when you should seek expert advice.

WHAT IS SALES TAX?

We all, as consumers, have a feel for what a sales tax is and “ouch!” is usually what we say when one is imposed on us individually. For a business owner, however, the definition is a little more complicated. Sales tax is a state tariff imposed on the sale of any taxable real or tangible personal property or taxable service as defined by each states' sales tax statutes.

DO I HAVE TO COLLECT SALES TAX?

Yes, if you are the seller of any taxable good or service. The responsibility is always on you to make sure sales tax is collected and remitted to the taxing authority. This is a cost of having a right to sell or conduct business in any jurisdiction and you can be held liable for any uncollected or unpaid sales tax. If you choose to not comply, the taxing authority will fine you and penalize you or your business, whichever the case may be. This is an area where any new business or established business starting a new venture needs to seek competent advice, because there are many goods and services which are not taxable. For example, food and accounting services are not subject to sales tax in Iowa but are in South Dakota .

WHAT IF THE PERSON BUYING THE TAXABLE ITEM SAYS THEY ARE EXEMPT FROM SALES TAX?

If the purchaser says he/she is tax exempt, make sure you request, receive and keep on file a copy of their exemption certificate. Unless you have an exemption certificate on file as protection, guess what? You now owe the tax they should have paid if they were not actually exempt. That goes for any individual or business that makes this claim. If you were the purchaser of a taxable good or service and you were not charged sales tax smile, smile, smile because the seller now owes your tax on the purchase you made.

WHAT IS USE TAX?

In addition to sales tax, an additional tax may apply under certain situations. The general rule is when a transaction is subject to sales tax but occurs outside your home state for use in your home state, it is subject to use tax.

Lets say you purchase a TV in South Dakota for use in your Sioux City home. You pay a 4% South Dakota sales tax when you purchase the TV. But, since the rate of sales tax is 5% in Iowa , the difference of 1% in considered Use Tax, and is owed to the State of Iowa .

Another example of when use tax would apply occurs frequently in Internet purchases. Assume your Iowa based business purchases a computer via the Internet for use at your office. The purchase was made from an out-of-state company that does not collect sales tax on the sale of computers. Even though your purchase did not include sales tax, since you will be using your computer in Iowa , a use tax must be paid to the State of Iowa . The percent of use tax that you would owe, is the difference between the percent you paid, in this case 0%, and the Iowa use tax rate, which is 5%. Therefore in this example, you would owe the State of Iowa 5% use tax.

WHY DO SOME AREAS OF THE STATE HAVE HIGHER SALES TAX RATES THAN OTHERS?

The amount of sales tax can vary not only from state to state, but also within state lines. Currently, South Dakota has a 4% state sales tax rate, while Iowa and Nebraska have a 5% rate. County and municipal governing bodies can also impose an additional tax to be collected along with the state tax and remitted to the state taxing authority. The county or local tax is imposed where the taxable transaction takes place. Usually these municipal taxes are less than the state sales tax rate. For instance, in Sioux City we have a local option tax of 1% and a Woodbury County tax of 1%. This raises the amount of tax to 7% that a business should collect on a sale of taxable goods or services.

WHAT IS NEXUS?

Nexus is the substantial physical presence of an individual or business conducting trade or business in a state, whether or not they have a physical site or place of business within that state. Once you have established nexus in a state you or your business is now treated as if you do indeed have a site or place of business in that state. You now come under that state's laws as to whether you must collect or pay sales tax. For instance, you are a mason and you are hired to construct a brick commercial building in another state other than where your home or established place of business is located. Because you physically have people in the state, you are said to have nexus in that state and are now subject to the rules in that state for taxation of your purchases and sales. Delivery of your inventory to another state by your business delivery vehicles gives you nexus in that state, as well.

ARE CHURCHES AND OTHER NONPROFIT ORGANIZATIONS EXEMPT FROM SALES TAX?

IOWA - Nonprofit entities, such as churches or religious organizations are not necessarily exempt from Iowa sales tax. State and local sales tax must be paid unless some other sales tax exemption applies. Nonprofit organizations are no different than private citizens in terms of sales and use tax purpose.

NEBRASKA - For the most part, any school, church or other religious organization is exempt from paying Nebraska sales and use tax. As far as other nonprofit organizations, not included above, only those specifically listed by the State of Nebraska are exempt. Some of which are organizations providing services exclusively to the blind, licensed nonprofit hospitals and health clinics, and licensed child-placing agencies.

SOUTH DAKOTA - In South Dakota , school districts and other public or municipal corporations, religious educational institutions, nonprofit educational institutions, charitable hospitals and charitable relief agencies are exempt from sales and use tax. The state of South Dakota does not allow churches any exemption from this tax.

DO FARMERS PAY SALES TAX ON THE PURCHASES THEY MAKE?

IOWA - Purchases by farmers can be separated into different areas. Generally, machinery and equipment are exempt if they are self-propelled implements, implements attached to a self-propelled implement, or grain dryers used primarily for agricultural production. Vehicles are taxable if they are subject to registration. Any implement attached to a registered vehicle is also taxable. Farm tractors and combines, however, are exempt if they meet the following requirements: they must be used primarily for agricultural production, are self-propelled, and do not require a registration. If machinery and equipment are purchased and become real property (property that becomes a permanent part of the farm) they become taxable. Parts are exempt if they are for exempt equipment, and are essential to the agricultural operation. Finally, the state of Iowa taxes all purchases of supplies by farmers.

NEBRASKA - The State of Nebraska gives an exempt status to machinery and equipment if it meets all of the following requirements. The purchase must be agricultural equipment or machinery. It must be used in commercial agricultural. Finally, it was purchased on or after January 1, 1993.

SOUTH DAKOTA - The purchase of farm machinery and attachments including irrigation equipment, which is used exclusively for agricultural purposes, are subject to a 3% state sales tax, not the normal rate of 4%. Farm machinery, irrigation equipment, and parts or repairs for farm machinery are exempt from all municipal sales tax.

DO CONTRACTORS PAY SALES TAX ON THE MATERIALS THEY PURCHASE?

Within the tri-state area, contractors are considered to be the consumer of building materials and supplies purchased for use in the construction of a contracted building or residence. Contractors are responsible for paying the sales tax at the time of purchase. There are some instances, however, where the contractor sells some materials over the counter on a regular basis and keeps an inventory of these items. In this case, the contractor may purchase the materials tax-free because they are acting as a reseller. It then becomes the contractors' responsibility to collect and remit the sales tax on those items. If an owner purchases materials for building their own structures, they are considered final consumers, and must pay sales tax on their purchases. The taxability of labor in regards to construction contracts is not as easily explained.

HOW OFTEN MUST I FILE A SALES TAX RETURN?

The requirements for filing a sales tax return are determined by the amount or your annual sales tax liability.

IOWA - Less than $120 in annual sales tax liability requires a return filed annually. If the sales tax liability is greater than $120, but less than $600 per year, a quarterly return is required. When the liability is greater than $600 annually, a monthly sales tax return is required.

NEBRASKA - Annual sales tax returns are required when the annual tax liability is less than $900. A quarterly return is submitted when the sales tax liability is between $900 and $3000 annually. If the liability reaches more than $3000 per month, a return will be required on a monthly basis.

SOUTH DAKOTA - All sales tax returns are required on a monthly basis. You may, however, request a different frequency of filing if your annual liability is relatively small, or if any unique situations exist.

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