What Are Taxable Purchases? A Look at Sales and Use Tax

Taxable purchases refer to transactions where a buyer is required to pay a tax on the goods or services acquired. These taxes are imposed by state and local governments, rather than the federal government.

Understanding Sales Tax

Sales tax is a consumption tax levied by state and local governments on the sale of goods and certain services. This tax is added to the purchase price at the point of sale, with the seller collecting it from the buyer and then remitting it to the taxing authority. Most states operate under a consumer sales tax system, where the tax burden legally rests with the buyer, and the seller acts as an agent responsible for collection.

Sales tax rates and regulations vary across different states and localities. While some states do not impose a statewide sales tax, others have systems combining state and local rates. The obligation for a seller to collect sales tax is determined by “nexus,” which signifies a connection between the seller and the taxing jurisdiction. This connection can be physical, such as having an office, warehouse, or employees in the state, or economic, based on a certain volume of sales or transactions within a state.

The Supreme Court’s 2018 South Dakota v. Wayfair decision expanded the concept of nexus to include economic activity, requiring out-of-state sellers to collect sales tax even without physical presence if sales meet certain thresholds. Sellers must register with state revenue departments where they have nexus to collect sales tax. Failure to collect sales tax when required can result in seller liability for uncollected amounts, interest, and penalties.

Understanding Use Tax

Use tax serves as a complementary mechanism to sales tax, ensuring that purchases are taxed even when sales tax was not collected at the time of sale. It prevents tax avoidance by consumers purchasing from out-of-state vendors who do not collect sales tax in the buyer’s state. Use tax also helps to level the playing field between in-state and out-of-state businesses, protecting local retailers from a competitive disadvantage.

This tax is the responsibility of the buyer to self-assess and remit directly to their state’s tax authority. Scenarios triggering use tax obligations include purchases made from online or mail-order retailers who do not have nexus in the buyer’s state. It also applies to items brought into a state for use where no sales tax was paid at the point of purchase, or when items purchased for resale are later used by the business for its own purposes.

The use tax rate is the same as the sales tax rate in the state where the goods or services are used, stored, or consumed. While sales tax is collected by the seller, use tax shifts the responsibility to the consumer to calculate and pay. This self-assessment aspect makes use tax more challenging to enforce compared to sales tax.

Common Taxable Goods and Services

Most tangible personal property is subject to sales tax. This includes clothing, electronics, furniture, vehicles, and prepared food items sold in restaurants. The specific list of taxable goods can vary by state, with some states taxing items like groceries or feminine hygiene products, while others provide exemptions for them.

The taxability of services varies across states. Historically, many states primarily taxed tangible goods, but many states now tax certain services. Services that become taxable in some jurisdictions include repair services, cleaning services, landscaping, and admissions to events.

Digital goods and services, such as streaming subscriptions or software downloads, have varying tax rules depending on state classification. Some states tax digital goods as substitutes for tangible products, while others do not. Businesses and individuals must verify state regulations regarding the taxability of services and digital products.

Exemptions and Non-Taxable Purchases

Not all purchases are subject to sales or use tax, with exemptions categorized by item type, purchaser, or use. Many states provide exemptions for items like most groceries and prescription medications. Medical devices and educational materials frequently qualify for exemptions, though specifics differ by state.

Purchaser-based exemptions apply to sales made to government entities and non-profit organizations. These entities are exempt from sales tax on purchases, requiring sellers to retain documentation of their exempt status. Purchases made for resale are also exempt; businesses buy goods without sales tax, intending to sell them to an end consumer who will then pay the tax.

Certain services are not taxable in most states. Professional services, like lawyers, doctors, or accountants, are exempt from sales tax. Similarly, many personal services like haircuts or dry cleaning are not taxed unless specifically enumerated as taxable by state law.