Few taxes affect as many taxpayers or are as confusing as sales and use tax. The foremost question often is “What is the difference?”
In Minnesota, the sales tax applies to retail sales of taxable services and/or tangible personal property made in the state. When collected by the seller, the tax is stated separately on the invoice. However, if for whatever reason the seller does not collect this tax when required, the buyer still has responsibility for making that tax payment. So, if you buy a taxable item for your own use without paying sales tax, you probably owe use tax. The transaction is the same, the rate is the same, the tax period should be the same; only the payee of the tax is different.
In the case of a sales tax, the tax is first paid to the seller, who then remits it to the Minnesota Department of Revenue. In the case of use tax, the purchaser pays the use tax directly to the Minnesota Department of Revenue.
Whether the transaction is taxable is not determined by whether or not the seller collects tax. There are several reasons a seller might not collect tax: it may be because the seller has no nexus, and therefore no responsibility to collect sales tax in the state in which the purchaser is located. It may be that the seller was under the impression that the sales tax need not be collected on a particular transaction. Or, the tax may not be collected because the purchaser has an exemption certificate on file with the seller, even though that exemption certificate may or may not be in effect for a particular transaction or at a particular point in time.
Because of these reasons, it is important that the purchaser review all purchases to determine whether sales tax has been paid. If not, the transactions should be examined to determine whether use tax is due. If the purchaser is not an exempt organization, if the subject matter of the sale is not exempt (due to its product or service nature, or by the location at which it was taken into possession by the purchaser) or if the goods were purchased for resale, use tax will likely be due. The purchaser must then report and pay use tax when filing for that period.
If the taxpayer is also a re-seller of property, the purchase may be exempt from sales tax at the time of sale, because it was acquired for re-sale. If tax was paid at the time of purchase, and subsequently, collected when that property was sold, the taxpayer/seller can claim a credit for the tax paid at the time of its purchase of the property when it files its sales and use tax report for the period. The tax is due only once on the amount of the sale – when it is sold by the re-seller – and consequently, credit can be taken for the original sales tax paid.
Sales tax is frequently not collected by the seller when the sale is made to a purchaser in another state. For example, if a seller in South Dakota sells to a purchaser in Minnesota, that seller may have no responsibility for collecting Minnesota sales tax. The purchaser in Minnesota will then be responsible for paying the use tax. This is also true if the transaction occurs via the internet, where the seller is in a different state than the purchaser. Here again, the purchaser is responsible for payment of use tax. This is true regardless of whether the purchaser is a business or an individual.
Sellers will not collect tax on a sale when the purchaser has a certificate of exemption on file. At times, the certificate may no longer be applicable, but continues to be used because the purchaser has not notified the seller that the certificate exemption should no longer be applied. Finally, some sellers simply fail to collect sales tax because they do not realize that the transaction is taxable. Again, in such a case, the purchaser is liable for the payment of the corresponding use tax.
Internal Liability Audit
Every business should undertake an internal sales tax liability audit on its own account. This can be done by the following process:
Identify every type of product or service sold and create a list. For each of those types of products or services, determine whether it is a taxable transaction (assuming first that the transaction is taxable) and if found not to be subject to tax, list an exemption statute number or reference to other Department of Revenue documents supporting the decision that the transaction is not taxable.
If the product or service is taxable, are all the transactions taxable? If not, detail the reason(s): an exemption form is on file; the product was shipped to a customer outside of Minnesota in which the seller has no responsibility to collect sales tax, etc.
Identify all types of purchases and create a list of those types. For each of those types of purchases, determine whether it is a taxable transaction. If the transaction type is determined to be exempt from sales tax, list a document from the Minnesota Department of Revenue or a reference to the Minnesota statutes, supporting the reasoning why this transaction is not subject to sales or use tax.
It may seem that an internal audit would be a rather onerous process. However, it is far less burdensome than imagined. The benefit of determining taxability of both purchases and sales will be well worth the effort expended in terms of protecting yourself or your business from unforeseen tax liability. The availability of ready documentation and support in the event of an audit by the Minnesota Department of Revenue will add to the ease of the process.