3. STATE SALES AND USE TAX
3.01 General Principles
Over the years, the sales and use tax has become a popular mechanism for raising revenues for local government. As of today, all but a few states have adopted some kind of sales and use tax.1
The sales tax has taken a variety of forms:
- Excise tax on sales.
- Business license tax.
- Gross receipts tax.
The use tax is a form of privilege tax and was initially enacted as a "backstop" to the sales tax. Generally, the use tax exempts property upon which the corresponding sales tax has been paid.
Both the sales and use tax have the following elements in common:
- They are both a one-time tax.
- The tax is a percentage of the sales price.
- They utilize the same exemptions and credits.
However, there are also differences between the sales and use tax:
- Only one state is entitled to impose the sales tax.
- The seller is generally liable for collection of the sales tax.
In some states, the general sales and use tax does not apply to aircraft. Instead, the aircraft are subject to a special excise or initial registration tax.
The Sales Tax
There are several different kinds of sales tax. The traditional sales tax is an excise tax on the sale of tangible personal property to the final consumer. Over the years, this tax has been extended to cover other types of transactions, such as repairs to tangible personal property and leases of tangible personal property. In some states, the sales tax has been extended to cover sales of services.
In many states, the sales tax was implemented as a business license tax or as a gross receipts tax. In some cases, this was a matter of necessity, mandated by state constitutional provisions prohibiting an excise tax on sales.2 In other cases, this was simply a matter of preference.
Distinguishing between these kinds of taxes can often be difficult. However, the consequences can be significant.
Excise Tax on Sales
The most common form of sales tax is an excise tax imposed on the sale of tangible personal property to the final consumer. This kind of sales tax has the following characteristics:
- The tax applies to the sale of property.
- The tax applies only to sales at retail.
- The seller is liable for collecting the tax from the buyer.
- The buyer is also liable for payment of the tax.
The excise tax is subject to the following constitutional limitation:
- The tax cannot be imposed on sales taking place outside the state.3
Business License Tax
In some states, the sales tax has taken the form of a business license tax, which is measured by sales.4 In contrast with the traditional sales tax:
- Only the seller is liable for the tax.5
- The tax can apply to sales for resale, although they are generally taxed at a lower rate.6
The business license tax is subject to the following constitutional limitation:
- The seller must be "doing business" in the state.7
A state may have both a statewide sales tax and a business license tax measured by sales.8 Many states with a sales tax also allow the imposition of local business license taxes measured by sales.9
Gross Receipts Tax
In some states, the sales tax has taken the form of a gross receipts tax. The language of the law must be reviewed to determine whether the tax is more like an excise tax or a business license tax.10
The Use Tax
The use tax is a privilege tax, imposed on the privilege of using the property in the state. The following general principles apply:
- The tax is imposed on the use of property in the state.
- The tax does not apply where sales tax has been paid.
- Credit is allowed for sales or use tax paid to other states.
- Sellers are asked to collect tax on deliveries into the state.
- The buyer is always liable for the tax.
The use tax is subject to the following constitutional limitations:
- The use tax cannot discriminate against out of state buyers.11
- Credit must be allowed for sales and use taxes paid to other states.12
- A seller cannot be required to collect tax on deliveries into the state unless the seller is doing business in the state.13
The Initial Registration Tax
A few states impose an initial registration tax on aircraft, which essentially takes the place of both the sales and the use tax. registration is typically required only for aircraft which are going to be based in the state. Although the initial registration taxes often do not have a resale exemption, they typically do not apply to aircraft held by dealers. In the case of a lease, special rules determine whether the lessor or the lessee is required to register the aircraft.
The initial registration taxes have the following characteristics:
- The tax is a one-time tax.
- The tax can be imposed at time of sale or time of registration.
- The tax typically applies only to aircraft based in the state.
- Dealers are generally exempt.
- The user is liable for the tax.
There are also a few states which, in the case of aircraft, treat their sales or use tax like an initial registration tax. These states tend to require payment of sales or use tax only if the aircraft is to be based in the state.14
- The only states which have not adopted some kind of sales and use tax are: Montana, New Hampshire, and Oregon. Contrary to popular belief, both Alaska and Delaware have a sales tax. Alaska has local sales taxes and Delaware has a statewide business license tax.
- See, e.g., Illinois.
- McCleod v. Dilworth, 322 U.S. 327 (1944).
- See, e.g., Southwest Kenworth, Inc., 561 P.2d 757 (Ariz. App. 1977) ["It has been firmly established that this tax is not one levied on the sale itself but on the privilege of engaging in business in Arizona, measured by the gross receipts from sales."].
- See, e.g., Livingston Rock & Gravel Co., Inc., 288 P.2d 317 (Cal. App. 1955).
- See, e.g., Delaware and Hawaii.
- American Oil Co. v. Neill, 380 U.S. 451 (1965).
- Washington has both a gross receipts tax (the Business and Occupation, or B&O, Tax) and a sales tax.
- See, e.g. Virginia.
- Compare the Arkansas Gross Receipts Tax Law 26-52-301 ["There is levied an excise tax . . . upon the gross proceeds or gross receipts derived from all sales to any person of the following . . ."] with the New Mexico Gross Receipts Tax Law 7-9-4 ["For the privilege of engaging in business, an excise tax equal to five percent of gross receipts is imposed on any person engaging in business in New Mexico."].
- Haliburton Oil Well Cementing v. Reily, 373 U.S. 64 (1963).
- See Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995).
- Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
- See, e.g., Minnesota and, effective 1999, Iowa.