An Introduction to the Sales Tax for Manufacturers
Sales taxes are taxes you pay on retail goods and services. Sales taxes are known as point-of-sale taxes because they are collected by the merchant or retailer when a sale occurs and then passed on to the governing jurisdiction. It sounds simple, but it can get quite complex. Indeed, in many instances, businesses may find they have more questions about the state sales taxes they're collecting from customers than the state income taxes they're withholding from their employees.
First, even within one state, there can be many jurisdictions, as various municipalities can collect a local sales tax in addition to the state tax. And the list of special taxes and exemptions can be enormous: Typically, essential items such as food and prescription medication aren't hit with a sales tax in most jurisdictions. On other hand, sales tax on items such as alcohol and tobacco may be higher than other items to discourage use of those products.
And that's just the beginning. What if you sell a mix of taxable and nontaxable items? Let's take a look at New York, for example. As the state explains with an example in a technical bulletin, issues crop up when you sell a mix of taxable and nontaxable items, such as when a fictitious company sells a gift set containing a cutting board, knife and several cheeses for $15. Even though cheeses are not taxable in New York, in this scenario, since the items are not sold separately, the entire $15 is subject to sales tax.
But if the items are sold separately for consumers to assemble their own gift package, then the cheese, priced independently of the board and knife, is sales tax-free.
And this is just New York — there are 44 other states that may have a different take on this!
Crossing the Borders
Companies can run into even more complexities when their sales cross jurisdictions. For example, let's say a manufacturer creates the aforementioned boards and knives in a factory in one state but ships them all over the country, selling the products directly to end users. Where is the sales tax levied? It depends if the manufacturer has a "nexus" or presence in another state. If a New York company has a warehouse facility, for example, in California, then it has a nexus in California and must collect California sales tax from customers in that state.
The difficulties of nexuses and the issue of whom you're selling your products to can get very tangled, so it pays to get professional advice. This is especially true after the June 2018 Supreme Court ruling that changed the rules regarding nexus for sales tax.
Even this brief discussion shows all the issues and potential pitfalls surrounding the sales tax. Give me a call to discuss your situation, so we can be sure you're on track for accurate sales tax collections and reporting.