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sales tax is a tax imposed on the sale of goods and services, typically as a percentage of the retail price and collected by the seller at the point of sale. A use tax is levied when a taxable item is purchased without the imposition of a sales tax or when the sales tax paid is lower than the use tax rate. Both are consumption taxes imposed by state and local governments, playing a critical role in government revenue systems and contributing to funding for various community needs.

What States Impose Sales and Use Taxes?

Currently, 45 states and the District of Columbia impose sales and use taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that do not impose sales and use taxes.

What is an Exemption Certificate, and Who Can Use One?

An exemption certificate documents an organization or individual’s tax-exempt status. This allows them to make a tax-free purchase, given specific requirements are met to qualify for sales tax exemption.

The federal government is an exempt organization across all states, and some state and local governments will provide exemptions to themselves. Other organizations that may be eligible to use exemption certificates include educational institutions, churches and religious organizations, non-profit hospitals, and charitable organizations, but eligibility and requirements vary from state to state.

What is Nexus, and How Does it Affect My Sales Tax Obligations?

Nexus is the connection a business has with a taxing jurisdiction. The presence of a nexus will generally give that jurisdiction the authority to impose taxes on the enterprise. The concept of nexus is based on the principle that businesses should only be subject to taxation in jurisdictions with a substantial connection or presence.   

It is significant because once a nexus is established, the company must remit sales tax made in that jurisdiction. This includes charging the correct sales tax rate, maintaining accurate records, and filing sales tax returns.    

As nexus laws vary among localities, businesses often seek outside assistance to help navigate nexus and tax complexities.    

Why is the Wayfair Case Important, and What is an Economic Nexus?

The South Dakota v. Wayfair case significantly affected sales and use tax regulations. Before the ruling, sales and use tax obligations were primarily based on where a business had a physical presence. However, the case established a new standard called economic nexus, requiring retailers to remit sales tax once a certain threshold of economic activity, such as volume of sales transactions or sales revenue, is reached within a particular state. This would make businesses liable for the collection of sales and use tax in states where they do not have a physical presence, such as online and other remote retailers. Since the case’s ruling, economic nexus has become a critical consideration for businesses looking to engage in online commerce that may initiate interstate business activities.

What Are the Consequences of Non-Compliance with Sales Tax Regulations?

Specific consequences will vary depending on the jurisdiction and severity of the non-compliance. The most common repercussions may include:   

  • Penalties and fines: Tax authorities may impose monetary fines and penalties. Based on the severity of the non-compliance, these penalties can significantly increase.   
  • Interest charges: In addition to monetary penalties, tax authorities may impose interest on overdue sales tax payments, which will accrue until the outstanding amount is paid.    
  • Legal action: Tax authorities may take legal action by pursuing lawsuits, court orders, and other measures to enforce compliance and recover unpaid taxes.   
  • Business disruptions: In some non-compliance cases, authorities may issue orders to cease operations or revoke business licenses until the tax issues are resolved.  

Calvetti Ferguson Sales and Use Tax Services

Calvetti Ferguson tax advisors are ready to work with you on your sales and use tax needs. From operations across multiple jurisdictions to complex tax scenarios, our solutions are tailored to meet your company’s specific needs. If you have questions about the information outlined above or need assistance, Calvetti Ferguson can help. 

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