glossary of sales and use tax terms

GLOSSARY

IPT Sales and Use Tax Symposium Beginner Basics

Beginner Basics Glossary Page | 1

GLOSSARY

The following definitions have been developed to facilitate an understanding of the course material. They tend to be generic in nature, and do not necessarily apply in any specific jurisdiction. In addition, the same terms may be defined differently in contexts other than those considered in the course material.

Term Definition Absorption The condition that exists when a seller does not add sales or

use tax to the selling price as a separate itemized amount, but instead remits the tax from his or her own funds (not commonly allowed). Absorption is also known as embedded Compare with separation. Example of State: Arkansas does not require a separate line item for tax.

Agency clause

A contract provision that gives one party the authority to act as an agent of the other. In a construction contract, such a clause may authorize a contractor to act as the customer's agent in making purchases.

Agent A person acting on behalf of another person, with the authority to bind the other person in dealings with third parties. Note that one can act on behalf of another without having this authority and this is sometimes referred to loosely and imprecisely as "agency."

Assessment Generally refers to a taxing authority's formal assertion that the taxpayer to whom it is issued owes a stated amount of tax, interest, and/or penalty.

Bracket system A tax chart provided by the jurisdiction that sets forth ranges of sales prices (usually less than $1.00) and prescribes the amount of tax due on transactions within each range.

Bulk sale A sale of all or a substantial portion of a business's assets. Examples may include the sale of a division or line of business. Certain states require the bulk sale be made to one entity.

Bundling Combining more than one item (which may include tangible personal property, services, intangibles, or any combination of them) in a single transaction with a single, non-itemized price.

Case law The law as developed in the decisions of courts. May refer to State cases or United States Supreme Court Cases.

Commerce Clause Article I, Section 8, subsection 3, of the United States Constitution. This clause provides that Congress shall have the power To regulate commerce with foreign nations, and among the several States, and with the Indian Tribes.

Common carrier

One that transports property for others for a price. The term generally refers to a carrier that is obligated to accept such business from the general public (in contrast with "private" or "contract" carriers). Other elements may also apply in a given jurisdiction (such as standardized rates or schedules).

Compliance Generally refers to the functions performed to adhere to the sales and use tax laws, including but not limited to registration, filing of sales and use tax returns, and


documentation of exemptions. Computer software Written or recorded instructions that direct the activities or

processes of a computer or peripheral devices. Note that distinctions may be made between canned or packaged versus custom software for sales and use tax purposes.

Conditional sale A transaction where property changes hands but title (held by seller) does not transfer until the full sales price has been paid by the purchaser.

Construction contractor A person who makes improvements to real property and/or may incorporate tangible personal property into realty.

1. Prime contractor - usually the focus person who is responsible to the owner for ensuring the job is completed properly and timely.

2. Subcontractor the person who is hired by the prime contractor to perform a specific task. An example of a subcontractor is a plumber.

Consumer levy A type of sales tax that is imposed on the purchaser and that the seller collects for the taxing jurisdiction. Common (although not universal) features include the following: absorption is not allowed; separation is required; the tax is a debt of the buyer to the seller; the buyer can request a refund directly from the state; and the seller receives a collection allowance for collecting the tax. Example of State: New York

Corporation An entity having authority under the law to act as a single person distinct from any other, including the shareholders who own stock in it. A corporation is generally treated as a separate and distinct taxpayer for sales and use tax purposes.

Cost plus, time and material, and separated contracts

Contracts that are usually billed showing the separated amounts for labor (time), equipment and materials.

Determination One of several terms that may be used to refer to a formal notification of assessment by the taxing jurisdiction, or to the resolution of a taxpayer's objections to such an assessment. The term can also be used more broadly to refer to other types of decisions or conclusions.

Direct pay authority Authorization granted by a taxing jurisdiction that allows a purchaser to choose to remit sales or use taxes directly to the jurisdiction rather than to the seller. When a purchaser provides the seller the required evidence of such authority, the seller is relieved of the obligation to collect tax from the purchaser.

Division A unit of business within a legal entity that is generally treated as indistinct from the legal entity of which it is a part. Divisions have the same Federal Identification Number as the Parent Corporation. Sometimes subsidiaries are referred to as divisions but a true subsidiary (even when called a division) is, in fact, a separate legal entity from that of its parent corporation. **See Subsidiary definition.


Electronic commerce Used broadly to encompass a variety of activities, including telecommunications, Internet access, online sales of products, services, or entertainment, electronic data interchange, electronic transfers of funds, and the use of proprietary networks. Sometimes used more narrowly to refer to Internet access and online sales.

Electronic Data Interchange (EDI) The transfer of data between different entities using electronic media, such as the Internet. For example, EDI may be used to replace paper purchase orders, invoices, tax returns and other documents with prescribed electronic data sets.

Electronic Funds Transfer (EFT) Transfers of electronic payments or collections via the internet or other data channels.

Enumerated services Generally refers to services that are specifically identified in a sales tax statute as taxable.

Escheat Reversion of property to the state when no legal heirs or claimants exist (such property is commonly known as unclaimed property).

Estimated assessment An assessment issued in the context of an audit when the taxpayer, according to the DOR, has not made available adequate records to determine its tax liability for the audit period. Estimates may be based on taxpayer records for a different period, industry data, or other information.

Excise (as in excise tax): An impost or duty levied on manufacture, sale or consumption of goods within a given geographical territory, or an extraction for license or permission to practice or conduct certain trades or occupations.

Examples:

International: Value-added tax

Federal level: manufacturers, fuel, transportation, telecommunications, luxury, firearms, sporting goods, alcohol, etc.

State level: fuel, tobacco, alcohol, gasoline, etc. sales, use, consumption, business and occupations, etc.

Local level: business license, transient or hotel, tourist, bed, etc.

Exclusion Two definitions: (1) A transaction that is outside the general scope of the statutes imposing the sales or use tax. Common examples include real estate, stocks, bonds, and most services. (2) An amount that is not included in the taxable base as a measure of sales and use taxes. Common examples include certain discounts, charges for freight, and charges for installation labor.


Exemption A transaction that is within the general scope of the statutes

imposing tax, but is the subject of special provisions removing it from taxation. While not in all states, common examples include exemptions for specific purchasers (i.e. federal government, charities), exemptions based on the nature of the product, and exemptions based on the use of the product.

Exemption certificate A document that establishes the exempt status of the item, the service, the purchaser, or the transaction, and relieves the seller of the obligation to collect or remit tax. Generally taken in good faith (that which a reasonable person would accept based on the type of engaged business).

Exhaustion doctrine Refers to a legal requirement in many taxing jurisdictions that a person pursue relief through an administrative process before applying to a court. The doctrine is commonly (but not universally) applied in tax matters.

Fixed price or lump sum contract

A contract that is for a set amount and does not separate out the charges for material, equipment and labor.

Grandfather clause

Generally refers to a provision of law that creates an exception from the law's effect for something that existed before the law's effective date. For example, a law increasing a sales tax rate may include an exception for contractor purchases made in performing contracts entered into or before the increase became effective.

Gross receipts The total amount of money or other valuable consideration received by a taxpayer for goods sold or services performed, before deductions.

Gross receipts tax A tax measured by gross receipts derived from non-exempt transactions. Three states (Arkansas, Hawaii and New Mexico) impose gross receipts taxes that operate similarly to a sellers privilege tax (see privilege tax definition).

Grounds Reasons for a position or conclusion. Examples include the taxpayer's stated basis for objecting to an assessment, and the taxing authority's basis for agreeing or disagreeing with the taxpayer.

Hearing When used broadly, any setting (including informal meetings) in which a person presents evidence or arguments to a decision maker. More narrowly used to refer to a formal proceeding such as a court session.

Home rule jurisdiction Self-regulating municipality, county, or other political subdivision that has authority to levy or administer its local sales and use taxes. The sales and use tax definitions and exemptions of home rule jurisdictions may differ from those in their states statutes and regulations.

Imposition clause The section in the statute that levies the tax. Also see Legal incidence and the four types of sales taxes (Consumer levy, Gross receipts tax, Privilege tax and Transaction tax).

Jeopardy assessment A type of assessment issued without the usual review procedures, when a jurisdiction believes that collection of an amount due would be jeopardized by delay or flight risk.


Lease A contract by which one party (lessor) gives to another

(lessee) the use and possession of property for a specified time and for specified payments or other consideration. Short-term leases may be referred to as rentals.

Legal incidence Generally refers to the object of a tax as expressed in the law. A state's law may impose a sales tax on the seller, on the buyer, or on the transaction. The legal incidence can affect who is liable to the state for the tax, who can sue or be sued for the tax, and who can claim refunds or seek other relief.

Managed Audit (MA) A tax compliance audit that the taxpayer conducts of its own records. Representatives of the taxpayer and the taxing authority will typically meet to discuss the parameters of the audit and other pertinent data. The areas reviewed in an MA are similar to those reviewed in a routine audit conducted by a state tax auditor.

Managed Compliance Agreement (MCA)

An agreement that allows the taxpayer to accrue tax on its purchases on a percentage basis. Before the MCA is formalized, representatives of the taxpayer and taxing authority will typically meet to discuss the taxpayers operations, accounting systems utilized, how data can be extracted, changes or anticipated changes within the company and how the taxpayer will monitor the accruals.

Manufacturing The process of taking raw materials or component parts and creating a new product which has a different form, with a change in its physical and/or chemical properties, and which has a greater value than in its previous form.

Measure The dollar amount upon which the tax is computed. For example, the sales price is commonly the amount to which the tax rate is applied in computing a sales tax.

Nexus The connection that a taxpayer must have with a state before that state may subject the taxpayer to its taxing powers. There must be nexus whether a state seeks to impose a tax directly on a business or instead seeks to impose on the business a requirement to register and collect taxes on its behalf.

Occasional, isolated or casual sale A sale made by a party not in business of selling, or an infrequent sale (usually less than three times a year) of property which is not normally held for resale or for which sales tax registration is not required (e.g., doctor sells his examining table).

Person In sales and use tax, a distinct legal entity. Includes natural persons, corporations, partnerships, trusts, and others.

Precedent The decision of a court. Generally it is a reference to a prior court case decision by another court. Can also refer to decisions of other tribunals and agencies.


Private ruling or Letter ruling A mechanism for a taxpayer to write to the revenue agency and ask what tax treatment will be given to a specific set of facts and circumstances.

Privilege tax (or sellers privilege tax) A type of sales tax in which the seller is liable for the tax measured by total taxable sales. Common (although not universal) features include the following: absorption is often allowed; separation is not required; and the seller, not the purchaser, is liable to the taxing jurisdiction for the tax.

Purchase price What one pays for what one buys. See also "sales price." Real property Land and improvements to land. Includes tangible personal

property that is incorporated into real property, and that meets the following tests:

1. it is annexed, incorporated, or attached to land or other real property;

2. the annexation, incorporation, or attachment is intended to be permanent; and

3. it cannot be easily removed without causing substantial damage to the land or the other real property.

Reciprocity Favorable tax treatment in one taxing jurisdiction conditioned on another taxing jurisdictions similar application in its own law.

Regressive The characteristic of the sales tax that its impact falls more heavily on the economically disadvantaged; exemptions for necessities (e.g., food, medicine, and clothing) tend to mitigate this effect.

Regulations Typically, the published rules of an agency, adopted according to a statutory procedure, that has the force of law until overturned. Revenue regulations generally contain the revenue agencys interpretation of the law, its directives on how taxpayers are to comply with the law, and/or its internal procedures.

Remedies The procedures available to a taxpayer to resolve an issue or obtain other relief. Examples include the hierarchy of hearings and appeals to which the taxpayer is entitled in order to resolve a tax matter or audit, refunds, ruling requests, and rulemaking that can be initiated by a taxpayer.

Resale certificate Generally, a written document given by the purchaser to the seller, representing that an item is purchased with the intent to resell it. If the certificate has all the contents required by the law of the jurisdiction, it relieves the seller of the obligation to collect or remit tax on the transaction.

Retailer The person making the sale to the final consumer; a person engaged in the business of making sales at retail (also called a jobber or dealer).

Retail sale Sale to an end consumer. Sometimes defined as a sale for any purpose other than for resale.

Rules See "Regulations." Ruling A generic term that can be used to refer to any decision or

expression of position or opinion of a governmental authority on a specific matter.


Sale A transaction which results in the passage of title or possession or both of tangible personal property from the seller to the buyer, or which results in the provision of a service by the seller for the buyer, in exchange for consideration.

Sales price What one charges for what one sells. Sales tax permit The evidence that a taxpayer has registered to collect sales

or use tax within the issuing jurisdiction. Sometimes called a registration certificate. (Note: businesses may be required to obtain other types of permits to operate.)

Separation In sales and use tax, the seller's itemization of the tax amount distinct from the sales price on an invoice or other tangible evidence of the sale. Commonly required. Compare with absorption.

Sellers Privilege Tax See Privilege Tax definition. Services Generally, the occupation or function of serving, repairing or

providing an activity to satisfy a public demand. Shifting In sales and use tax, shifting refers to the buyer bearing the

economic burden of a tax that may be legally imposed upon the seller.

Statute The law enacted by a legislature. The word "code" may also be used in this fashion, but can also mean a body of administrative regulations.

Statute of limitations A provision in the law that prescribes the time within which a claim must be asserted. There are normally statutes of limitations applicable to assessments and refund claims.

Subsidiary A corporation that is owned or controlled by another corporation. A subsidiary is generally treated as a separate and distinct taxpayer for sales and use tax purposes. A subsidiary has a different Federal Identification Number than the Parent Corporation.

Tangible personal property Property, other than real property, which can be held, smelled, touched, seen, tasted, or is in any other manner perceptible to the human senses. Excludes intangible property that is evidenced by tangible things, such as stocks, bonds and money.

Tax clause Generally refers to a contract provision that addresses the way the parties will handle tax issues amongst themselves. Tax clauses within contracts do not supersede the tax statutes.

Trade-in Generally, any allowance or credit for any tangible personal property taken in partial payment by a retailer on the purchase of goods.

Transaction tax A type of sales tax in which the transaction, rather than the buyer or the seller, is subject to tax. The seller is liable to the state for the collection and remittance of the tax. The buyer is also directly liable to the state for any unpaid tax. Common (although not universal) features include the following: absorption is not allowed; separation is required; the tax may be a debt of the buyer to the seller; buyers may not be able to get a refund directly from the state; and a collection allowance may be available to the seller for collecting the


tax. Transactional The characteristic of a sales or use tax that indicates the tax

is applied to a discrete event (a single sale or use), rather than a series of events (e.g., all of the income for one year) or a condition (e.g., the value of property as of a given date).

True object test A test used to evaluate the intent of the parties in determining whether or not a transaction is taxable (often when a transaction involves a mix of products and services). For example, the test may be applied to decide whether the intent of the parties was a taxable sale of tangible personal property per se or the transfer of tangible personal property incidental to a non-taxable service. Also known as the essence of the transaction test.

Use The storage, use or consumption of taxable property or services and includes the exercise of any right or power incident to the ownership of the property.

Vendor discount An amount a retail seller is permitted under the law to deduct from the tax remitted to the jurisdiction, as compensation for collecting the tax. May also be referred to as the collection allowance or similar terminology.

Voluntary disclosure A process by which a taxpayer can settle past liabilities with a jurisdiction by coming forward prior to any contact by the jurisdiction. It is often begun anonymously via a third party, and generally results in a negotiated agreement that relieves the taxpayer of civil and criminal penalties or other amounts that would otherwise be subject to assessment on audit.

Waiver A term most commonly used in the tax field to mean the taxpayers formal agreement to keep a period open for review and assessment by the taxing jurisdiction, that is, an agreement to forego the benefit of the statute of limitations. A waiver is evidenced by a form completed and signed by the taxpayer and the jurisdiction.

Wholesaler A person that makes sales to resellers rather than to the end consumer.

Wholesale sale A sale to a retailer or other purchaser who is not an end consumer.

glossary of sales and use tax terms

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