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Sales and Use Tax

Posted by Kamyar Mehdiyoun, Esq. | Jan 27, 2024

Sales and Use Tax Explained

Sales of goods and some services are subject to sales tax in a majority of states. In addition to states, many cities collect sales tax as well. Some states like Maryland exempt specific items from sales tax. For example, sales of food by grocery stores or sales of medicine are exempt from sales tax in Maryland.

As a rule, the vendor acts as the state's agent and collects the required sales tax from the purchaser. Vendors in states such as Maryland are required to obtain a use and sales tax license. The amount of sales tax collected by vendors is reported to the state taxing authorities by filing sales and use tax return. Out-of-state vendors need to determine whether they need to file a sales and use tax return. Such a filing is required when the out-of-state vendor has sufficient business dealings, or nexus, in the state where the purchaser is located.

The focus of many tax audits of businesses is the proper collection and reporting of sales taxes. If you are a small business owner and need help in understanding the application of sales tax rules in your state, contact Mehdiyoun Law Firm online or by phone at (240)499-8333.

What is a Sales and Use Tax?

A sales and use tax is a tax on the sale or use of goods. Such taxes vary by state. While some states only have one type of tax, others may have both. This can make it difficult for businesses to understand what they owe and how to stay compliant with the sales and use tax laws. 

Sales tax is a kind of consumption tax that is imposed on the sale of goods and services. In Maryland, sales tax is calculated as a percentage of the sale price or value-added to tangible personal property. The current state sales tax rate in Maryland is 6%. However, different localities may add their own taxes on top of the state rate.
Maryland has a 6% sales tax rate, but localities may add their own taxes on top of the state rate.

There are several types of transactions that are subject to sales tax in Maryland. These include retail sales, leases and rentals, taxable services such as cleaning or landscaping provided by associates or attorneys, and digital products like e-books and software downloads. It's important for taxpayers to understand which transactions are subject to sales tax so they can accurately report them and avoid potential penalties from audits conducted by Maryland taxing authorities.

Use tax is a state sales tax that applies to purchases made outside of the state but used within it. It's designed to level the playing field between in-state and out-of-state businesses. Use tax often catches taxpayers off-guard, as many assume they don't owe taxes on items purchased outside of their home state. To avoid penalties, it's essential to understand when use tax applies and how to calculate it correctly.

When you purchase goods or services from another state without paying sales tax, you're typically required to report and pay use tax on those items in your home state. Here are some common triggers for a use tax audit:

  • Large amounts spent on out-of-state purchases
  • Inconsistent reporting practices
  • Failure to file a return
  • Unreported taxable transactions

Calculating use tax can be complicated, especially if you're dealing with multiple jurisdictions or complex types of transactions.

Maryland businesses may face different types of taxes depending on their location and the nature of their operations. If you are a business owner in Maryland who is facing a sales tax audit or require additional information about sales tax laws in Maryland, contact our tax attorney Kamyar Mehdiyoun for assistance. 

About the Author

Kamyar Mehdiyoun, Esq.

Kamyar Mehdiyoun, holds a Master of Law (LL.M.) degree in taxation from Georgetown University Law Center and focuses his practice on tax law. In 2003, he received the Award for Excellence in Tax Practice and Procedure from Georgetown. He also holds a Certificate in Employee Be...

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