Sales Tax Exemptions
Sales tax is imposed by states for “the privilege of selling tangible property” and certain taxable services “at retail,” i.e., to the ultimate consumer of the property or service.
The financial burden of the tax is normally passed on to customers, but sellers are required to collect, report, and pay over the tax. Sellers need to keep apprised of changes in the laws and their application and make sure they comply, because they may be required to pay sales tax not collected on transactions and be unable to recover those taxes from the original purchaser because of the effort required and possible damage to ongoing relationships with customers.
Sellers’ purchase of items to sell to customers are not taxable as a “sale for resale” (“wholesale”).
Sales Tax Exemptions
Five states (Alaska, Montana, New Hampshire, Delaware, and Oregon) do not impose sales taxes, but most American sellers must collect and report sales tax.
States normally also have a “compensating use tax” system in place requiring in-state purchasers to pay a tax comparable to sales tax on items purchased without being subject to sales tax, e.g., purchased outside the state or on the internet, which the purchaser stores, uses, or consumes in the state.
States are actively working to enhance their sales tax collection, both by limiting exemptions and expanding application to out-of-state sellers, especially online activity. Out-of-state and online sellers with a physical presence in a state (a store, office, warehouse, employees, agents, etc.) must collect sales tax from customers in that state. In addition, states can require out-of-state sellers that don’t have a physical presence but do have “nexus” (i.e., significant connections or contacts with the state) to collect that state’s sales tax from sales in that state. States ideally want to expand the application of their sales tax to out-of-state sellers who merely “exploit” that state’s economy, i.e., make money from the state’s residents.
A related issue beyond this article is the requirement to file returns and pay income or business activity taxes related to sales in other states.
There is also an effort to enact a national “Streamlined Sales Tax Act,” which would require vendors (including out-of-state vendors) to collect and pay over sales tax based on the purchaser’s location (destination sourced) rather than the vendor’s location.
Companies that conduct business across state lines must be familiar with and follow all sales tax laws that apply to their products and services as they transact business in various states. Sales tax laws vary from state to state as each state’s statutes differ. Each state’s administrative agencies and courts interpret and enforce the state’s laws, even if seemingly similar, in different ways. The laws and their interpretations can change over time, so companies need to stay informed of changes.
Certain items or transactions are not subject to sales tax due to “exemptions” (specified by statute) and “exclusions” (not being within the defined taxable classes) from sales and use tax.
To avoid paying sales tax that does not apply, sellers and purchasers need to check for exemptions and exclusions. This article does not include every exemption offered in Missouri, and sellers and purchasers should consult with an attorney to be sure that they are taking advantage of all the exemptions and exclusions that apply to their situation.
- Property returned by customers for a full refund or credit [§ 010.1(3)].
- “Livestock” raised in confinement for human consumption (cattle, calves, sheep, swine, ratite birds,g., ostrich and emu, aquatic products defined in section 277.024, R.S.Mo, legal domestic elk, goats, horses, other equine, or rabbits) [§ 144.010.1(4), definition, & § 144.030]
- The isolated or occasional sale of tangible personal property, service, substance, or thing, by a person not engaged in such business, unless there are multiple sales exceeding $3,000 in a single calendar year [§ 010.1(2)].
- Property sold in the course of the partial or complete liquidation of a household, farm or non business enterprise [§ 010.1(2)]
- Trade-in allowance is excluded in computing sales tax: 1) if sales or use tax was paid on the traded article or it was exempted or excluded; and 2) a bill of sale or other record shows the trade-in allowance [§ 025.1]
- Trade-in treatment applies to a motor vehicle, boat, or trailer sold (rather than traded directly) if the seller purchases or contracts for purchase of a subsequent motor vehicle or boat within 180 days [§ 025.1]
- Motor vehicle rebates are not included in the purchase price to determine tax due [§ 025.1]
- Computer printouts, output, and computer-assisted photo compositions, or microfilm or microfiche enabling the purchaser to obtain the desired information contained for his or her own use are a non-taxable service [§ 010.1(10)]
- Those products and types of food for which food stamps may be redeemed pursuant to the provisions of the Federal Food Stamp Program as contained in 7 U.S.C. § 2012 are taxed at 1% [ 144.014 ]
- Manufacturing equipment and replacement parts used to manufacture goods and services to be ultimately sold at retail
- Sales to the government (federal or state) or charities
- Property used for 90 days outside the state before use in Missouri (persons moving to the state)
- S.Mo § 144.011 – “Sale at retail” does not include certain transfers of tangible personal property [Transferee’s assumption of transferor’s liabilities incident to transactions in paragraphs 1 to 6 below do not disqualify the transfer if related to the property transferred and the assumption does not have as its principal purpose the avoidance of Missouri sales or use tax. § 144.011.2]
- From one corporation to another corporation by merger;
- Incident to the liquidation or cessation of a taxpayer’s trade or business, and NOT made in the ordinary course of the taxpayer’s trade or business;
- To a corporation solely in exchange for its stock or securities or as a contribution to capital;
- To a partnership solely in exchange for a partnership interest or as a contribution to the capital;
- By a corporation to its shareholders as a dividend, return of capital, liquidating distribution or in redemption of the shareholder’s interest;
- By a partnership to its partners as a current distribution, return of capital or liquidating distribution of the partnership or of the partner’s interest;
- Reusable containers for which a deposit is required and refunded on the containers return;
- Restaurant purchases of non reusable items furnished with retail sales of food or beverage, e.g., wrapping or packaging materials, containers, trays, napkins, dishes, silverware, cups, bags, boxes, straws, sticks and toothpicks;
- Hotel purchases of non reusable items furnished to guests and included in the room charge made, e.g., soap, shampoo, tissue and other toiletries and food or confectionery items offered to the guests without charge;
- Transfer of a manufactured home OTHER than:
- The initial retail sale (delivery of “manufacturer’s statement of origin” or “MSO”);
- Delivery of “Repossessed Title” to a state resident IF tax was NOT paid on the initial transfer;
- The first transfer after December 31, 1985, IF tax was NOT paid on any transfer before December 31, 1985; or
- Charges for initiation fees or dues to:
- Fraternal societies, orders, or associations operating under the lodge system where a substantial part of the activities are devoted to religious, charitable, scientific, literary, educational, or fraternal purposes; or
- Organizations of past or present United States armed forces members or an auxiliary unit or society of, or a trust or foundation for such organization, and substantially all of the members are past or present United States armed forces members or cadets, spouses, widows, or widowers, and no part of the net earnings inure to the benefit of any private shareholder or individual.
Note that the “highway use tax” on use of vehicles on Missouri roads under § 144.440 may apply to vehicles transferred e.g., from a corporation to a shareholder on corporate dissolution in spite of the exemption under § 144.011.
- S.Mo § 144.027 – Replacement of a stolen or destroyed (casualty loss) motor vehicle, trailer, boat or outboard motor:
- Purchased or contracted to be purchased within 180 days of payment by the insurance company, or date of loss if no insurance;
- Up to the amount of insurance proceeds plus deductible; or
- Fair market value if not insured determined by the Kelly Blue Book, NADA Used Car Guide, Abos Blue Book or the average of 2 appraisals from licensed motor vehicle or boat dealers
- IF all sales or use tax was been paid on the lost unit
- S.Mo § 144.030 – Various (in part)
- Materials, manufactured goods, machinery and parts used in manufacturing becoming a component part or ingredient of the new personal property resulting from such manufacturing
- Materials, replacement parts and equipment purchased for use directly on, and for the repair and maintenance or manufacture of, motor vehicles, watercraft, railroad rolling stock or aircraft engaged as common carriers of persons or property
- Replacement machinery, equipment, and parts and the materials and supplies solely required for the installation or construction used directly in manufacturing, mining
- Machinery and equipment, and parts and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing or mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing or mining
- Animals or poultry used for breeding or feeding purposes
- Electrical energy used in the actual primary manufacture or mining
- Machinery, equipment, appliances and devices purchased or leased and used solely for the purpose of preventing, abating or monitoring air or water pollution
- Insulin and prosthetic or orthopedic devices … including hearing aids and hearing aid supplies and all sales of drugs … medical oxygen, home respiratory equipment and accessories, hospital beds and accessories and ambulatory aids, … manual and powered wheelchairs, stairway lifts, Braille writers, electronic Braille equipment and, if purchased by or on behalf of a person with one or more physical or mental disabilities to enable them to function more independently, … scooters, reading machines, electronic print enlargers and magnifiers, electronic alternative and augmentative communication devices, and items used solely to modify motor vehicles to permit the use of such motor vehicles by individuals with disabilities or sales of over-the-counter or nonprescription drugs to individuals with disabilities
- Aircraft to common carriers for storage or for use in interstate commerce
- Sales made by or to not-for-profit civic, social, service or fraternal organizations, including fraternal organizations which have been declared tax-exempt organizations pursuant to Section 501(c)(8) or (10) … in their civic or charitable functions and activities and all sales made to eleemosynary and penal institutions and industries of the state, and all sales made to any private not-for-profit institution of higher education not otherwise excluded
- Sales made to any private not-for-profit elementary or secondary school
- Sales of feed additives, medications or vaccines administered to livestock or poultry in the production of food or fiber
- Sales of pesticides used in the production of crops, livestock or poultry for food or fiber
- Sales of bedding used in the production of livestock or poultry for food or fiber
- Sales of propane or natural gas, electricity or diesel fuel used exclusively for drying agricultural crops
- Natural gas used in the primary manufacture or processing of fuel ethanol
- Sales of handicraft items made by the seller or the seller’s spouse if the seller or the seller’s spouse is at least 65 years of age, and if the total gross proceeds from such sales do not constitute a majority of the annual gross income of the seller
- Livestock sales when either the seller is engaged in the growing, producing or feeding of such livestock, or the seller is engaged in the business of buying and selling, bartering or leasing of such livestock
- Grain bins for storage of grain for resale
- Feed which are developed for and used in the feeding of pets owned by a commercial breeder when sold to a commercial breeder
- Purchases by a contractor on behalf of an entity located in another state exempt from sales and use taxes on purchases pursuant to the laws of the state
- S.Mo § 144.034 – Advertising sales bylegal newspapers pursuant to R.S.Mo Chapter 493, advertising agencies, broadcast stations, andstandardized outdoor billboard advertisingare a service and not the sale of tangible personal property. Tangible personal property purchased by the advertiser for use in producing advertising is for use or consumption and not for resale (i.e., subject to sales tax).
- S.Mo § 144.070.5 – Persons, companies, or corporations in the business of renting or leasing motor vehicles, trailers, boats, or outboard motors (used exclusively for rental or lease purposes, and not held for resale) may IF approved to operate as a leasing company:
- Pay the tax due at registration (and not chare on rentals); or
- In lieu thereof may pay a sales tax on the rental charged.
Sales and use tax laws are complex, differ from state to state, and do not always apply in the way that you might imagine. Small details can completely change the application of sales and use taxes, and can result in a company failing to pay the correct sales taxes. To be sure that you follow your state’s tax laws and regulations, discuss the details and your specific situation with a tax lawyer.
Contact the attorneys at Carnahan, Evans, Cantwell & Brown, P.C. if you need help managing sales tax exemptions. It is easier for an attorney to represent you if you are both in the same geographic area, but we may still be able to assist you even if do you not live in southwest Missouri. Let us provide you with the sound legal counsel you need to manage the situation and navigate the regulations of the IRS or Missouri Department of Revenue. To get started, telephone us at 417-447-4400 or contact us online. We look forward to hearing from you!
Portions of this article are © Frank C. Carnahan, www.carnahanlaw.com, included by permission.