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Taxable Transactions

One of the common elements of the different types of sales taxes is that the taxable event is a retail sale. In each of the states that impose a general sales tax, the main target of the tax are retail sales of tangible personal property.

What are "retail sales"? Each state has its own technical definition for what it considers to be a "retail sale." The states' general method of operation is to define the term as broadly as possible and then provide that all such sales of tangible personal property are presumed to be taxable unless a specific exemption from tax applies. In essence, the result is that almost any sale of tangible personal property to the ultimate user or consumer are potentially taxable retail sales.

As a general rule, the method of payment has no effect on whether a sale is subject to sales tax. Credit sales, installment sales, lay-away sales, conditional sales, and sales involving trade-ins or other exchanges of property are no less taxable than are sales for cash.

True object test. In many instances, it isn't too difficult to spot a potentially taxable retail sale of tangible personal property. There's not much to dispute when items such as cars, equipment, tools, furnishings, food, or clothing are involved. However, the issue isn't always so clear cut. For example, is the sale of a computer software program a taxable sale of tangible personal property? How about commercial photographers' sales of their prints? Or, consultants providing their advice in written reports?

Although each of these examples involves the transfer of some tangible personal property, you could argue that what's really being purchased and sold are the expertise and services of the programmer, photographer, or consultant. Assuming that the underlying services are not themselves taxable, successfully making this argument would insulate the transactions from sales tax.

Tip

All of the states recognize this "true object" argument. However, whether the purchaser's intent primarily was to acquire the property or the service is a subjective determination. Furthermore, the states are not always consistent in how they approach their analysis or in the results they reach. Accordingly, if you're regularly going to be faced with this type of problem, either for your purchases or your sales, you should consult your tax professional for guidance on how you should treat those transactions for the state or states where you do business.

In addition, you should be aware that:

  • In recent years many states have broadened the scope of their sales taxes to encompass at least some services.
  • Most leases of tangible personal property are potentially taxable retail sales.