FAQs: Use and Sales Tax

I am a small business owner who recently opened a store. I sell a variety of items but am not sure whether and how to collect sales taxes. What should I do and what happens if I fail to collect sales tax?

[Maryland, Virginia and Washington, D.C. impose sales tax on a variety of transactions. Because the rules are different in each jurisdiction, the following answer assumes the above taxpayer is located in Maryland.]

Both retail sales of tangible personal property in Maryland and its use in Maryland trigger imposition of sales and use tax. In addition to tangible personal property, some services are also subject to sales and use tax in Maryland. Vendor acts as the agent of the state and collects the tax. The sales tax itself, however, is paid by the purchaser. There exists a presumption that all sales in Maryland are subject to tax, unless proven otherwise. The burden of proof is on the purchaser to show that the sale is not subject to tax.

Under Maryland law "use" is defined as an exercise of a right or power to use, consume, possess, or store that is acquired by a sale for use of tangible personal property or a taxable service.

If the tangible personal property was acquired outside of Maryland and on its way to be sold in another state and is merely temporarily stored in Maryland, it is not subject to Maryland's sales and use tax.

A store owner like the one in the above question, must ascertain which items on sale are taxable and which are not. For example, food and medicine are not subject to sales tax in Maryland. A partial list of items not subject to sales tax in Maryland is as follows: energy efficient appliances, eyeglasses, fishnets, flags, hearing aids, publications, video tapes, water and wood products.

The business owner in the above question needs to obtain a sales tax license because under Maryland law if the individual makes any sale in the state, he must first obtain such a license. The owner must also file timely sales and use tax returns with Comptroller of Maryland.

Maryland imposes various types of civil and criminal penalties for failure to file sales and use tax return or failure to pay the tax. Failure to pay the tax when due triggers a penalty of up to 10% of the tax due. Filing a false sales and use tax return with an intent to evade such tax will subject the offender to a maximum of 100% of the tax underpayment. Failure to file the sales and use tax return when the intent is tax evasion will cause the nonfiler to be subjected to up to 100% of the sales taxes due.

Willful failure to file a sales and use tax return is a criminal offense, subjecting the offender to a maximum monetary penalty of $10,000 and of up to 5 years in jail. If the individual willfully makes a false statement or misleadingly omits an item on a sales and use tax return, he is subject to a maximum monetary penalty of $10,000 and of up to 5 years in jail. The penalty also applies to an officer of a corporation who is responsible for filing the sales and use tax return.

Delinquent sales and use taxes can result in civil and criminal penalties. In addition, such delinquencies can prevent renewal of business and professional licenses. If you have incurred sales and use tax debts or have failed to file sales and use tax returns, you should consult with an experienced tax attorney. A competent tax lawyer can help you arrive at a tax efficient resolution to your business tax problems.

Kamyar Mehdiyoun is a tax attorney who assists clients with issues relating to sales and use tax, delinquent tax liability, tax liens, tax levy, back taxes, tax collections, delinquent sales and use tax obligations, wage lien, sales and use tax violations, tax fraud, tax evasion and tax audits. If you need a tax lawyer, contact Kamyar Mehdiyoun’s tax law firm located in Rockville,
Maryland and serving Maryland (MD), Virginia (VA) and Washington, DC metro area as well as the rest of the U.S.