Top 7 Myths About Sales Taxes

Common misconceptions about sales taxes explained

Mother and teenage son (15-17) looking at sticker on new car
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Sales taxes can be surprisingly complex, for both consumers and business owners.  Here are some common myths about sales taxes to help you separate fact from fiction.

Myth #1:  If I buy a car in a sales tax-free state, I don’t have to pay sales taxes

False.  You will have to pay use tax (usually the same rate as sales tax) in your home state when you register the car.

Myth # 2:  Internet purchases are not subject to sales tax


  Many times you won’t be charged sales taxes when you purchase items online, but this doesn’t mean that you don’t owe tax on the purchase.  Most online retailers only charge sales tax in certain states because of a concept called Nexus.  This federal precedent only requires retailers to collect sales taxes in states where they have a physical presence.

However, consumers are technically supposed to report these purchases on their state income tax return and pay the sales taxes at that time.  There are several pending court cases and even a proposed federal regulation aimed at changing these Nexus laws, so tax-free online sales may soon be a thing of the past.

Myth # 3:  Nonprofits are exempt from sales taxes

False.  Nonprofit status, if properly applied for and approved by the IRS, gives an organization an exemption from federal income taxes.  Most states also recognize this exemption for state income taxes as well, but many states do not exempt nonprofits for sales taxes.

 In most states, nonprofits have to pay sales taxes on their purchases and charge sales taxes on items that they sell.

Some states allow nonprofits, such as charities, to apply for a special exemption from sales taxes.  However, these exemptions usually only cover purchases that the organization makes for use in their tax exempt purpose.

 Even with these exemptions, the nonprofit is usually still required to charge sales taxes on items it sells. 

Myth # 4:  If I run a business in a given state, I have to collect sales taxes on all sales I make in that state

It depends.  Most states have a destination-based sales tax, which means that the sale is thought to take place in the jurisdiction where the product is ultimately used (where it’s shipped to or picked up from).  A few states have an origin-based sales tax, which means the sale is considered to take place at the location where the sale is completed (the seller’s business location).  If you are running a business in a origin state, all sales you make would be taxable in that state. 

However, if you are running a business in a destination state, you would not have to collect sales taxes on sales that are shipped out-of-state.  You would also not have to collect sales taxes for the customer’s state unless you have Nexus, or a physical presence, in that state.  The customer would simply pay those sales/use taxes on their own.

Myth # 5: Leases are not taxable sales

False.  Most, if not all, states consider leases of tangible personal property to be taxable sales.  However, real estate leases, such as apartment rentals, are usually not subject to sales taxes.

  Hotel rooms, on the other hand, are generally subject to sales taxes.

Myth # 6: I don’t have to collect or pay sales taxes if I am running a small business online

False.  You are required to collect and remit sales taxes for any state where you have Nexus, or a physical presence.  In the case of a small online business that is shipping items to customers all over the country, this would usually mean charging sales taxes on items that are delivered to customers within the state where the business is located. 

Myth # 7: My business was subject to a sales tax audit and no errors were found.  That means I’m doing everything right.

False.  A sales tax audit is only meant to ensure that a business is collecting and remitting taxes correctly for their state.  The primary objective is to make sure you are not underpaying.

  However, you could be overpaying and overcharging your customers and the auditor may not find it because they're not looking for it, or they simply may not tell you.  An auditor of one state will also not be able to tell you if you are subject to sales taxes in another state.  That is beyond the scope of their audit.