Sales of goods and some services are subject to sales tax in a majority of states. In addition to states, many cities collect sales tax as well. Some states like Maryland exempt specific items from sales tax. For example, sales of food by grocery stores or sales of medicine are exempt from sales tax in Maryland.
As a rule, the vendor acts as the state’s agent and collects the required sales tax from the purchaser. Vendors in states such as Maryland are required to obtain a use and sales tax license. The amount of sales tax collected by vendors is reported to the state taxing authorities by filing sales and use tax return. Out-of-state vendors need to determine whether they need to file a sales and use tax return. Such a filing is required when the out-of-state vendor has sufficient business dealings, or nexus, in the state where the purchaser is located.
The focus of many tax audits of businesses is the proper collection and reporting of sales taxes. If you are a small business owner and need help in understanding the application of sales tax rules in your state, contact our IRS tax law firm.