Most states charge a sales tax on retail goods and services. The state tax is relatively low but add on local and regional taxes and it starts to add up. In addition to sales tax, residents must pay use tax. We’re used to paying tax, but how much is it exactly and how does sales tax differ from use tax?

What is Sales Tax

Very simply, this is a tax on the sale of goods and services that is imposed by the government. It is a percentage of the purchase price and is collected by the seller of goods or services. The sales tax percentage varies by state, with some states not imposing a tax. Currently, 48 states require sales tax. 38 states also have a local tax. The state tax is combined with the local tax where applicable.

What is Use Tax

Use tax is a tax imposed on the use of taxable items and services in New York when the sales tax has not been paid. Use tax generally applies to the purchase of tangible personal properties and taxable services outside the state but used within New York State. The objective of New York’s use tax is to incentivize New York residents to shop locally l instead of shopping in states that have a lower or no sales tax. Though residents might initially save by shopping out of state, they will still owe a use tax. If you pay sales tax, you will not have to pay use tax. For example, let’s say you buy a treadmill in New York City. You will pay the 4% state sales tax, along with other local taxes (outlined below). If you buy that same treadmill from a New Jersey vendor to be used in New York City, you may not be charged New York sales tax. That’s when New York’s use tax kicks in. New York requires residents to report out-of-state spending on your annual New York state income tax return.

Sales and Use Tax Rates

In 2022, the NY state sales and use tax rate remains at 4%. Depending on local tax rates imposed by a city, county, or school district, the total tax rate can be as high as 8.875%. The tax rate in the five boroughs is the highest in the state, at 8.875%. That’s the combined total of the city sales tax rate of 4.5%, NY sales tax rate of 4% and the Metropolitan Commuter Transportation District (MCTD) surcharge of 0.375%.

Register as a Sales Tax Vendor

If you plan to sell property or services in New York State that are subject to sales tax, you must register with the Tax Department to obtain a Certificate of Authority. The Certificate of Authority gives the seller the right to collect tax on its taxable sales and to issue and accept most New York State sales tax exemption certificates. Generally, the seller collects the tax from the purchaser and remits it to New York State. Failure to register for sales tax purpose and engaging business without valid Certificate of Authority will be subject to monetary penalty up to $10,000.

Sales Tax Exemption

There are items that are exempt from sales tax. In New York, clothing and footwear are not taxable if they cost less than $110. Newspapers, dry cleaning, and water delivered through mains and pipes are exempt. For a comprehensive breakdown of which goods and services are taxed and which are not, click here.

Some of the Tax Law exemptions:

  • Purchases for resales. Sales tax exemption certificates enable a purchaser to make tax free purchases that would normally be subject to sales tax
  • Most sales to or by the federal and New York State governments, charitable organizations, and certain other exempt organizations
  • Sales of most food for home consumption
  • Sales of prescription and nonprescription medicines
  • Sales tax does not apply to most services

Recordkeeping

For sales tax, you must keep detailed records of every sale, the amount paid or charged, delivery location, and the sales tax due by jurisdiction (i.e., sales invoices; shipping documents).
For use tax, you must keep detailed records of the nature, type, value, and the amount of all business purchases (i.e., purchase invoices).

Filing Requirements

Once you register with the Tax Department, your business will be classified as a quarterly filer unless it is qualified as an annual filer. If your business’s total taxable sales and purchases subject to sales or use tax exceeds $300,000 in a quarter, it must file monthly (as referred to as part-quarterly) returns in addition to the quarterly returns. Sales tax returns are due 20 days after the filing period ends.

Economic/Wayfair Nexus

In June 2018, the U.S. Supreme Court’s ruling in South Dakota v. Wayfair, Inc. allowed states to require that sellers collect, and remit sales tax based on the establishment of an “economic nexus,” doing away with the previous “physical presence” test. Hence an out of state seller could establish “nexus” through economic activity alone. Currently there are more than 40 states with economic nexus laws in place. Threshold for economic nexus typically vary from state to state. However, many states have a threshold of $100,000 in sales or 200 transactions in the state annually. For example, if your New York-based business is making online sales of more than $500,000 to California, you must register, collect, and remit sales tax in California.

If you have additional questions about sales and use tax or how to register your business, please reach out.