Federal income tax deduction for state sales and use taxes reinstated

Your federal tax deduction for state sales and use taxes could be larger than your income tax deduction depending upon your circumstances

On December 18, President Obama signed a massive federal spending bill into law. Among other things, the law reinstates a federal income tax deduction for state sales and use taxes paid by individuals. This deduction officially expired at the start of 2015, but the new spending bill retroactively abolished the expiration date, thereby making the deduction “permanent” according to its legislative supporters.federal income tax deduction for state sales and use taxes paid by individuals.

What is the sales tax deduction?

Taxpayers who itemize deductions on their federal income tax return (Form 1040, Schedule A) are no doubt aware they can claim any state and local income taxes paid as a deduction. But a taxpayer may elect to deduct state and local sales taxes paid. This is in lieu of the income tax deduction. In other words, you may deduct either your state income tax paid or state sales tax paid, but not both. This election only applies for the current tax year, however, so if you take the income tax deduction on your 2015 return, you could still take the sales tax deduction on your 2016 return.

Why is there a deduction for sales and use tax?

Although most states assess some form of personal income tax, seven states do not, while two others only assess dividend and interest income but not wages or salary. This creates a disparity with respect to the federal income tax, as residents of states with no income tax, like Florida, are at a disadvantage compared to residents of states like California that charge a high income tax. The sales tax deduction is designed to remedy this imbalance.

Keep in mind, you can elect to take the sales tax deduction regardless of the state you reside in. While it is generally a good idea to take the income tax deduction in a state that has one, there may be situations where the sales tax deduction would be more favorable to you in a particular tax year.

How do I calculate my sales tax deduction?

As a basic rule, an individual can deduct the actual sales taxes he or she paid in a given tax year. This means you must actually keep the receipts of your purchases showing the sales tax paid. Alternatively, the IRS publishes tables of predetermined deduction amounts based on your state and locality. The IRS also provides an online calculator to help determine your deduction under this alternate method. You are free to choose either method.

 What sales taxes cannot be deducted?

You may not deduct any business expenses on Schedule A, which includes sales tax paid on items used for your trade or business. There may also be limits on how much sales tax you can deduct on an individual purchase. For example, if you pay more than the “general sales tax” rate for a motor vehicle, you may only deduct the amount equal to the general sales tax. Additionally, if you receive any refund for sales tax paid in a given tax year, you must reduce your deduction by an equal amount.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Back To School sales tax holiday list for 2015

Back To School Sales tax holidayThe most complete list of all 17 states holding a Back To School sales tax holiday for 2015, updated July 14, 2015.  This list is complete with items sales tax will be suspended on, the upper price limit, the sales date ranges, when the sales were first initiated, and a link to where you can get more information.

The 2015 Back To School sales tax holiday will be held in Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

Keep in mind that while some states suspend the state portion of the sales tax during these Back To School specials, but county, city, or other local sales taxes might still apply if those municipalities are not participating the sales tax holiday.

Also consider that not all items are viewed equally in the eyes of the tax adjuster. Shoes may be considered an item of clothing in one instance, but “track shoes” may be considered sporting goods and not included along with the tax-free items during this Back To School sales tax holiday.

State Items Included Max Price 1st Year 2015 Dates Information Links
Alabama clothing $100 2006 August 7-9 http://www.revenue.alabama.gov/
computers $750
school supplies $50
books $30
Arkansas clothing $100 2011 August 1-2 http://www.dfa.arkansas.gov/
school supplies
Connecticut clothing and footwear $300 2001 August 16-22 http://www.ct.gov/drs/
Florida school suppies 2007+ August 7-16 http://dor.myflorida.com/
clothing $100
supplies $15
computers $750
Georgia school supplies 2012+ July 31 – August 1 http://dor.georgia.gov/
clothing $100
supplies $20
computers $1,000
Iowa clothing $100 2000 August 7-8 https://tax.iowa.gov/
Louisiana all taxable personal property $2,500 2007 August 7-8 http://www.revenue.louisiana.gov/
Maryland clothing & footwear $100 2010 August 9-15 http://www.marylandtaxes.com/
Mississippi clothing & footwear $100 2009 July 31-Aug. 1 http://www.dor.ms.gov/
Missouri clothing $100 2004 August 7-9 http://dor.mo.gov/
computers $3,500
school supplies $50
New Mexico clothing $100 2005 August 7-9 http://www.tax.newmexico.gov
computers $1,000
computer equip. $500
school supplies $30
Ohio clothing $75 2015 August 7-9 http://www.tax.ohio.gov/
school supplies $20
instructional material $20
>Oklahoma clothing $100 2007 August 7-9 http://www.tax.ok.gov/
>South Carolina clothing 2000 August 7-9 http://www.sctax.org/
school supplies
computers
other
Tennessee clothing $100 2006 August 7-9 http://tn.gov/revenue/
school supplies $100
computers $1,500
Texa clothing, backpacks and school supplies $100 1999 August 7-9 http://comptroller.texas.gov/
Virginia clothing $100 2006 August 7-9 http://www.tax.virginia.gov/
school supplies $20
energy star products $2,500
hurricane preparedness items $60
generators $1,000

Source: Federation of Tax Administrators

How a taxpayer may obtain a sales tax refund or credit

The steps for claiming a sales tax refund or credit vary by state, but the most common procedures include adjusting the sales reported or tax due on the following return; amending the original return; or filing a separate refund claim either by letter or by a specific form.

sales tax refund methods

Methods various states allow for individual taxpayers to obtain a sales tax refund.

Traditionally, consumers were required to request sales tax refunds through the vendor they made the original purchase through. The vendor was then obliged to file a refund claim with the state on behalf of the customer. This method protected the state from duplicate refunds.

Today, with the growing popularity of reverse audits and sales and use tax recovery specialists, many vendors complained that filing refunds claims on behalf of the customer was overly time consuming. In response, many states have adopted procedures for the vendor to assign the right to receive the refund to the customer which, once awarded, allows the consumer to deal directly with the state in obtaining a refund of the sales taxes paid in error. Before filing a refund claim with a vendor, taxpayers should check with the state to determine if an assignment is feasible.

Source: CCH “Sales and Use Tax Answer Book” (2014)

Vendor sales tax refunds must be passed on to consumers

Vendors normally collect sales taxes from consumers on behalf of the state. States need to provide some method for the refund or crediting of over payments in the case of returned goods, repossessions, or simple errors in tax calculation or interpretation.

When a product is returned and the money is refunded, the sale is undone and the tax is appropriately returned to the vendor which returns it to the consumer. The same theory applies to the uncollected portion of the sales price on repossessions and bad debts if the sale and tax had been previously reported.

Most states will only refund sales tax when presented with evidence that the tax has been returned to the consumers. Courts have ruled that to allow the vendor to keep the tax collected from the purchaser is “unjust enrichment,” therefore, vendor sales tax refunds from the state must be passed on to the consumer.

To claim a sales tax refund, the vendor must be able to document that the tax has been remitted to the state or local jurisdiction, that the tax was wrongfully or erroneously collected and remitted, and that the tax has been returned to the consumer where appropriate.

Online travel companies continue to battle over sales tax collection

Hotel occupancy taxes ruled not due on online markups in North Carolina

Online travel companies (OTCs) won another important sales tax victory last month in North Carolina, where a state appeals court rejected efforts by four counties to assess occupancy taxes on the fees collected for Internet-based reservations of hotel rooms. The OTCs obtain rooms for the hotels at a discount and sell them to customers at a higher rate. The counties argued the OTCs should then pay occupancy taxes on their higher rate. The courts disagreed.

Online Travel Companies

Online travel companies (OTCs) won another important sales tax victory last month in North Carolina, where a state appeals court rejected efforts by four counties to assess occupancy taxes on the fees collected for Internet-based reservations of hotel rooms.

The North Carolina legislature allows counties to assess occupancy taxes through local ordinance. But the counties may only tax those transactions already subject to the state’s sales tax. The four counties in this case all impose occupancy taxes: 6% in Wake County, 5% in Dare County, 4% in Buncombe County and 8% in Mecklenburg County. All four counties filed separate lawsuits against a number of OTCs seeking judgments the companies were required to collect and remit occupancy taxes. The four lawsuits were eventually consolidated and heard before a state superior court judge, who granted the defendants’ motion to dismiss in 2011.

In a decision issued August 19th of this year, a three-judge panel of the North Carolina Court of Appeals upheld the superior court’s dismissal. Judge Wanda Bryant, writing for the panel, said sales and occupancy taxes only applied to “retailers” or a “similar type business.” The counties conceded the OTCs were not retailers. Therefore, the question was whether they constituted “similar type” businesses. Bryant said they were not. In this context, the “type” of business was anyone who operated “hotels, motels, tourist homes, or tourist camps,” not companies that merely “arrange” the rental of such facilities via the Internet. The counties argued the court should read the definition of “similar” business more “broadly,” but Bryant said that would “ignore” the clear language of the state’s sales tax law.

The appeals court also rejected the argument, principally raised in Mecklenburg County’s complaint, that the OTCs had a duty under their contracts with individual hotels to collect and remit sales tax on the marked-up prices charged to online customers. Bryant said the trial court properly granted summary judgment to the OTCs on this point, noting the counties failed to identify any North Carolina statute or binding case law on this point. Unlike other states, Bryant said, North Carolina does not recognize a general duty to remit sales tax based on “contractual undertaking.”

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

« Older Entries