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Sales tax Glossary
Accounting period - The period covered by each round of the business's financial reports. Transactions from this period are gathered, reviewed, and analyzed together to create reports. The period may be three months, six months, or a year, and the cutoff dates can be based on either the calendar year or the fiscal year.
Administrative authority - An agency that oversees the process of collecting business taxes. Every business is required to register with the administrative authority in their jurisdiction in order to submit tax reports and acknowledge requests such as audits.
Affiliate nexus - The connection that a business has with a state through the presence of someone who is not an employee. This person, such as a third party who refers customers to different sellers, expands the business's market share in that state in an indirect manner.
Amended tax return - A tax return that has been modified by the taxpayer in order to remove errors. This tax return may either be digital or paper-based and should be submitted according to the administrative authority's instructions.
Assessment - The calculation of the total tax owed by the taxpayer. This assessment is done by the administrative authority in charge.
Back tax - An unreported tax that is yet to be paid by the taxpayer. This may be the entire taxes for a year in which the taxpayer didn't file at all, or an amount that the taxpayer underpaid when filing.
Backfiling tax - The process of filing sales tax returns after the due date has passed. A taxpayer may need to backfile if they have:
a) failed to file their returns on time
b) failed to pay the tax amount due
c) made a mistake while filing the original tax return and need to file an amended returnBad debt - This is tax that is due to the taxpayer but has not been collected. Sales tax is meant to be collected from the customer at the point of sale, because the customer is the final consumer of the product. If the customer does not pay the tax, it becomes a bad debt and the seller may be able to receive a tax return credit or a refund for it from the tax authority.
Bundled transaction - This is a transaction in which multiple goods are sold together as one item (for example, an assorted baby essentials pack). This can lead to complications in determining sales tax amounts, if some items in the pack are taxable and the others are not. In most cases, if a taxable good is included in a pack, the total price of the pack is taxed, but the retailer can also choose to collect taxes only for the taxable portion of the bundle.
Business and Occupation (B&O) tax - A type of tax that is levied on an entity for conducting business within a certain jurisdiction (currently Washington, Ohio, and West Virginia) Unlike a sales tax, it is levied on the business itself as a percentage of gross revenue, and not on the customer. It cannot be reimbursed.
Cascading tax - A type of tax that is added to each stage of the supply chain, resulting in the customer having to pay a high amount of tax while buying the final product. For example, for a handmade ceramic vase being sold online, tax is added when the potter creates the vase, when the painter buys it to decorate it, and also when the final seller buys it and sells it online. At each step, the price being taxed includes the previous tax, making the total tax grow quickly.
Casual sale - A sale made by an individual who is not directly or officially related to the business. Most casual sales are exempt from sales tax, as long as the individual does not make more than three such sales within a year.
Certificate Service Provider (CSP) - A state-funded outsourced service provider that is certified under the Streamlined Sales and Use Tax Agreement. Businesses can use CSPs to help determine the sales tax that they owe, or to help them with tax compliance.
Commercial Activity Tax - This is an annual tax imposed on businesses operating in Ohio that meet one of these conditions:
a minimum of $50,000 in Ohio property and payroll
a minimum of $500,000 in taxable gross receipts
a minimum of 25% of total property, payroll, or gross receipts coming from Ohio
located completely in Ohio
This is not a sales tax, and is determined on the basis of taxable gross receipts. Once a business becomes subject to this tax, the registration process has to be completed within 30 days.
Communication sales tax - A tax that is imposed on communication services such as wireless telephone, landline, and pager services. The providers of these services collect these taxes from their customers and remit them to the tax authorities. These tax rates can differ based on the state.
Conditional sale - A contract-based sale where the transfer of ownership does not happen until a specified time, typically after the final installment has been paid. The tax is paid after the lease or transfer of the good. For example, a car sale in which the title is transferred after the loan is paid off would be a conditional sale.
Consumption tax - A broad category of taxes in which tax is levied on the amount spent on purchasing goods or services, rather than on income. All sales tax is a type of consumption tax. Within this category, the type and rate of tax can depend on the jurisdiction and what is being purchased.
Corporate Activity Tax - This is an annual gross receipts tax imposed on all businesses with an annual revenue of more than $1 million from taxable commercial activity in Oregon. Businesses crossing $750,000 in sales have to register with the Department of Revenue (DOR), but only have to begin paying this tax once they cross $1 million.
Credits - Amounts that may be used to reduce a taxpayer's tax liability.
Customs - Taxes that are specifically levied on imports and exports. These are also known as tariffs.
Deduction - An adjustment to a person's income tax owed, based on the tax they have paid on purchases during the tax period. For instance, if someone has paid sales tax on large purchases like a home or a car, they may be able to deduct that sales tax from their income tax owed.
Destination situsing - Also known as destination-based sales tax, where goods are taxed based on the buyer's location or final delivery location, not the seller's location. Most US states follow destination-based sales tax rules.
Direct pay permit - Allows a buyer to pay taxes directly to the tax authority instead of through their vendors. This permit is generally given to larger companies that will make multiple regular purchases, have been tax compliant so far, and have an actual purpose for using this system. When a permitted business makes a purchase, they must provide a copy of the permit to the seller, who must maintain records of the purchase amount and the buyer's information.
Entity-based exemption - A tax exemption for transactions based on the identity of the buyer. For example, government authorities and certain manufacturers and farmers are exempt from having to pay taxes when making purchases.
Excise taxes - A special, indirect tax on the manufacture of specific products like alcohol, fuel, and tobacco. This tax is first imposed on the seller, who then includes the tax amount in the total price of the product so it is indirectly paid by the customer. This tax is often combined with sales tax.
Exemption - A rule under which sales tax is not applied to certain transactions. It may be based on the identity of the buyer (such as the federal government) or on the nature of the goods being purchased (such as groceries, livestock, and farm equipment).
Exemption certificate - A certificate that allows a buyer to make purchases without paying taxes. This certificate has to be filled out by the buyer and given to the seller while purchasing goods or services. If this certificate is not provided, a seller can still charge sales tax to the buyer.
Filing frequency - How often the taxpayer is expected to file their returns. This is determined by the tax authority. The filing frequency for sales tax can be monthly, quarterly, semi-annual, or annual.
Filing period - A period for which tax returns are filed. Sales tax returns are generally due on the last day of the month following the filing period. For example, if quarterly sales tax is being filed for January through March, the filing period ends on March 31 and the due date will be April 30.
Financial transaction tax - A tax levied on specific monetary exchanges or financial transactions, including buying or selling stocks, bonds, and derivatives. This tax is imposed on the transaction, not the institution itself.
Freight charges - Charges that are incurred when goods are being transported from the seller to the buyer. These charges are determined based on the type of good that is being sold.
Fulfillment centers - A warehouse facility that performs certain actions on behalf of the seller. The seller, not the fulfillment center, is responsible for paying sales tax on the goods shipped from the center. This is especially relevant for sellers who are involved in e-commerce and/or want to outsource some of their work.
Gross income - The total amount of income received and earned, before considering deductions like expenses, taxes, and cost of goods sold.
Gross proceeds of sales - The total value that has been gained from sales, without subtracting any deductions and losses.
Gross receipts tax - A tax that is imposed on a company's total revenue from sales, without adjustments for any costs or expenses. Unlike sales tax, which is applicable only to final consumer transactions, this tax is also applicable to transactions that take place between businesses.
Home rule states - States where the state tax base (the total amount of assets or income that can be taxed within the area) can be modified by the local jurisdiction. Arizona and Colorado are home rule states.
Hybrid situsing - When the origin of a sale is different from the destination of the sale and the two jurisdictions determine the tax together.
Indirect tax - A tax where the seller collects the tax from the buyer, and then reports and pays it to the tax authority.
Intercompany transaction - A transaction that takes place between two different subsidiaries of the same company. It can also take place between the parent company and its subsidiary. For example, if company A has subsidiaries A1 and A2, any transaction that takes place between A1 and A2 is considered an intercompany transaction.
Intra-jurisdictional sales - Sales that take place within a single jurisdiction (state, county, or city) and do not cross any tax boundaries. Inter-jurisdictional sales, on the other hand, take place between two different states or jurisdictions.
Intracompany transaction - An internal transaction that takes place between two different divisions or branches of the same company.
Jeopardy assessment - A special tax assessment conducted when the tax authority believes that the taxpayer is unlikely to pay the tax owed. For instance, if the tax authority believes a taxpayer is preparing to leave the country to avoid paying, it may use a jeopardy assessment to collect taxes before the person leaves.
Jurisdiction - An area with its own tax regulations, such as a state, county, or city; or the government with the authority to collect taxes in that specific area.
Luxury tax - A tax that is imposed on luxury goods (which are goods that do not fall under the category of basic and necessary requirements).
Managed Compliance Agreement - A cooperative written agreement between a state tax authority and a taxpayer, agreeing on a tax percentage and tax collection method for the total purchases made during a given period. This allows the business to save time by paying one overall sales and use tax instead of many small ones.
Marketplace Fairness Act - Streamlines the collection of taxes, ensuring that retailers without a physical presence can also be taxed. This also helps retailers with a presence in different states collect and submit taxes easily.
Multistate tax commission - A government body that attempts to make the process of paying sales tax in multiple states simpler and more uniform.
Nexus - The commercial connection that a business has with a state, which determines whether sales tax can be levied there. Nexus can be established through physical presence, employee presence, temporary contractors and agents, or even property ownership. Even if a company has nexus in a state, they generally must meet a certain threshold for income or sales in the state to be responsible for sales tax there.
Origin-based sales tax - A method in which sales tax rates are determined based on the state in which the seller is located, rather than the state in which the product is consumed. For instance, if a seller is in the origin-based state of Texas, their sales will be charged based on Texas sales tax rates.
Privilege tax - A tax that businesses pay for the privilege of operating within a specific state. Such taxes are usually levied on particular regulated industries, such as vehicle sales, alcohol distribution, or utility services. The privilege tax in Arizona is called Transaction Privilege Tax.
Proportional tax - Any tax system that requires all tax payers to pay a uniform tax rate, irrespective of their income. Sales tax is a type of proportional tax.
Provincial sales tax - Similar to US sales tax, but applicable only in participating Canadian provinces. It's a retail sales tax levied on consumers when they purchase a certain good or service, in addition to the Goods and Services Tax (GST).
Resale certificate - Required for businesses that purchase goods with the intention of reselling them. When goods are being purchased for the purpose of re-sale, sales tax cannot be levied even if the goods are taxable. So in order to prove the purpose of the purchase, a resale certificate is necessary.
Retail sales tax - A tax collected by a retail business from its customers on behalf of a taxing authority. This type of tax applies only to retail businesses that sell goods directly to consumers. The frequency of filing returns for these taxes can be monthly, quarterly, or yearly, based on the state's requirements.
Sales tax - A tax that is levied on goods and services that are sold. The seller collects the tax amount from the customer and remits it to the taxing authority. Sales tax is also often called sellers use tax.
Sales tax ID - A required identification held by a business that conducts sales. This tax ID is what enables them to collect and keep track of sales taxes. Also known as a federal tax identification number.
Sales tax license - A document required for businesses in some jurisdictions in order to be eligible to collect sales tax.
Sales tax situsing - The process of identifying the location where a sale takes place, in order to assess sales and use tax.
Shipping charges - Charges that can be incurred while delivering or shipping goods from one place to another. In some states, shipping charges are taxable.
Sin tax - A form of state or local excise tax that is levied on certain products regarded as socially hazardous, such as alcohol and cigarettes.
Statute authority - A government entity that has the power to administer taxes, collect taxes, and create laws surrounding sales tax.
Streamlined sales tax - An agreement intended to simplify the process of collecting taxes from different states and make it easier for sellers to comply. If a state has adopted this agreement, they must have an electronic registration system, a simplified process of remitting taxes, and a uniform tax base consistent with other member states.
Tangible personal property (TPP) - Possessions that can be physically sensed and moved. This includes personal property, including online sales. It does not include stocks and other intangible investments. These goods are subject to sales tax unless specified otherwise.
Tax audit - A review of the taxpayer's book of accounts in order to confirm whether they have been compliant with the rules. This review is generally done by an appropriate authority in the taxpayer's jurisdiction.
Tax liability - The total tax amount that a taxpayer owes.
Taxable goods and services - Goods and services that can be taxed by the seller at the point of sale.
Trade discount - A reduction of a product's total price. A trade discount is typically offered when purchases are made in bulk, especially by a wholesaler. When tax is calculated for such sales, the tax is collected based on the reduced price and not the total price of the product. For example, if a case of noodles is priced at $30, and it's discounted to $20 for a customer who's buying in bulk, sales tax will be applied on the discounted price of $20.
True object test - A test used to determine how to tax a transaction consisting of both products and services. The portion of the purchase that is the consumer's main goal will determine how the entire transaction is taxed. For instance, if a customer buys a taxable piece of equipment as a main goal, and incidentally also receives an installation service for it, the transaction will use the tax rules for the piece of equipment.
Turnover taxes - A type of tax applied to the production of a product rather than its sale. Like VAT, it is not used in the United States.
Use tax - A tax levied on purchases for which sales tax was not applied, usually when the product has been bought from an out-of-state vendor. This tax is considered to apply to the product's use and storage in the buyer's home state.
Value Added Tax (VAT) - A tax levied based on the value that is added to a product. Unlike sales tax, this tax is collected and remitted at every stage of the supply chain. VAT is not used in the United States.
Vendor - Someone who sells goods or services to a customer. The vendor in a transaction is the person who is responsible for collecting sales tax from the customer, and the person who will face penalties if the tax is not paid.
Vendor discount - A discount that is provided in some states to reward business owners who record, file, and remit sales tax on time.
Voluntary Disclosure Agreement - An agreement that a business makes with a state to which it owes unpaid taxes from prior tax periods. By agreeing to disclose and pay what it owes, the business can generally avoid being prosecuted or fined for not paying sooner. This can be particularly helpful for companies that have been doing business in a state but have yet to pay sales tax there.