What are Sales Taxes?

States impose certain taxes on transactions that occur within the borders of their state to help pay for the administration and services provided to the citizens of that state. In this article, we will discuss the sales tax that triggers when a retail sale of tangible property is made. There are other events that may trigger sales tax to be collected, but those events are not within the scope of this article.

The presumption is that each retail sale is taxable, except in special situations. This could be a business having a tax exempt status or holding a valid reseller license. The seller is generally responsible for knowing the appropriate tax rates to charge, but the burden is on the purchaser to establish exemption from the sales tax charge.

Where it gets interesting is that each state is responsible for setting its own sales tax rate tables and the type of sales tax system in use in that state. There are different types of sales tax systems currently active in different states in the United States. The primary difference between the sales tax systems is whether the seller or the purchaser is the taxpayer responsible for paying the sales tax.

  • Some states impose the tax on the sellers, who can then choose whether to pass it on to their purchasers.
  • Other states impose the tax on the purchaser, thus making the seller only responsible for the collection and remittance of the sales tax to the state.
  • In another group of states, the sales tax liability is imposed on the transaction itself. The sales tax liability is shared by both the seller and the purchaser!

Sales tax is calculated on the gross proceeds of the sale. This generally includes shipping charges as well, except in certain situations.


What are the Different Sales Tax Systems?

We generically use the term “sales tax” regardless of the state where the transaction occurs, but states do not see it as plain and simple. Different states impose the sales tax obligation differently, as described above. Knowing the sales tax rules in your state is extremely important because it could have serious financial impacts on your business if it is not understood. It determines:

  • Who the liability falls on for the payment of the sales tax;
  • Who could be sued over the failure to pay the sales tax;
  • Who can make a claim for the refund of an overpayment.

There are three general types of sales tax systems in use:
  • Seller (vendor) privilege taxes. The state imposes these taxes on the retailers (sellers). This is imposed for the privilege of being able to make a retail sale within the state’s borders. This type of tax gives the retailer (seller) the option to absorb the sales tax and pay it out of the proceeds of the gross sale, or to pass the cost on to the purchaser by applying a sales tax charge as a line item on the sales receipt.
  • Consumer excise (sales) taxes. The state imposes these taxes on the consumers (buyers). This is imposed for the purpose of making of a retail purchase within the state’s borders. This type of tax causes the retailer (seller) to serve purely as an agent who collects the sales tax from the buyer on the state’s behalf and, subsequently, pays the tax to the state. Because the tax is the buyer’s responsibility, this type of tax does not give the retailer the option to absorb the sales tax and pay it out of the proceeds of the gross sale. The retailer must list the sales tax amount as a separate line item on the receipt provided to the buyer.
  • Retail transaction taxes. The state imposes these taxes on the retail transaction itself. The liability of making the sales tax payment is equally upon both the buyer and seller. The retailer is responsible for collecting the tax and paying it to the state. The buyer is responsible for ensuring they pay the tax to the seller so that they can pay it to the state. Again, in this sales tax system, the seller is not given the option to absorb the sales tax and pay it out of the gross sale proceeds. The sales tax must be collected as a separate line item in addition to the gross sales amount.

The majority of the states have the second form of sales tax where the consumer has the legal burden of the payment of the tax and the seller only acts as an agent to collect and remit the sales tax.


What if My Wholesale Supplier Does Not Collect Sales Tax?

As a purchaser of liquidation product, a LARGE AMOUNT of financial liability is riding on you knowing and understanding your state’s sales tax codes. In the vast majority of the states, you will be dealing with a consumer excise tax or retail transaction tax. Do not ignore paying the sales tax if you do not have a resellers license! Without written proof in the form of a receipt or invoice showing that you paid the tax, you are personally liable for the payment of these unpaid taxes, not the supplier, regardless of what the supplier says.

If you do not have a Reseller License and your wholesale supplier does not require you to pay the sales tax on your purchase, that can only be LEGALLY accomplished in one of two ways:

  • The supplier does not have a physical location in your state AND has not reached the economic nexus threshold for your state, which requires them to collect sales tax AND you live in a Seller Privilege Tax state. This could be totally legitimate and 100% legal. For me, this would bring up a few different concerns:
    • For the majority of states, you, as the buyer, are the responsible party and bear the legal burden of paying the sales tax, regardless of what the supplier says. You need to be 100% sure that you are conducting business in a Seller Privilege Tax state to be safe in this scenario.
    • HOWEVER, you are not relieved from the obligation to collect and remit the sales tax when you sell the product. You are still liable to pay the sales tax to your state when you sell the items.
    • Personally, my main concern would be a little more strategic from a business perspective. Remember that for this to be legal, the supplier must not have reached the economic nexus threshold of sales in your state. If this is true, then you are working with a supplier that is not very big! What kind of purchasing power is the supplier leveraging to get you better pricing on your truckload purchases? These truckloads are expensive and, therefore, should cause the supplier to cross the economic nexus fairly quickly if they are selling any volume of trucks.
      • If they are not selling enough volume to exceed the economic nexus threshold, then are they really getting you a good deal on your load? Your supplier is not moving enough volume to demand discounted pricing.
      • Also, is the supplier big enough to stand behind the product when there is a problem with the load?
  • The second way this could be legal is if the supplier is paying the sales tax out of the proceeds of the sale. This is only legal in Seller Sales Tax States!
    • Again, my concern in this scenario is more strategic. If the supplier is paying the sales tax out of the sale’s proceeds, then that means they have built that cost into the price of the load. As a business, I would want to get an itemized receipt showing that the sales tax was paid on the purchase.

      If it is being paid anyway, I would prefer/require the supplier to itemize this on my invoice so that I can show proof that I paid the sales tax if the state auditors ever came knocking on my door. I would not want my business liable for someone else’s failure to comply with the rules. You can make the decision on whether you want to take that risk yourself.
    • Also, remember, that you are not relieved from the obligation to collect and remit the sales tax when you sell the product. You are still liable to pay the sales tax to your state when you sell the items.

Ultimately, the best decision is to get your own Reseller License so that you do not have this major risk looming over your business. That is your decision as to whether you would like to take that risk.

If you have any questions, experiences, or would like to disagree with any of these statements, certainly let us know! These articles are being created for the education and awareness of everyone and to create some good discussions!