When it comes to sales tax sourcing, possession is at least nine tenths of the law. If a dealer transfers possession to a purchaser in the state, the sale is sourced to that state. This rule has been adopted by every state that is a full member of the Streamlined Sales and Use Tax Agreement and, as far as I can tell, by every other state as well.
It is a bit more difficult to determine whether a state imposes use tax on a transaction. States do not clearly or consistently apply their definitions of what it means to “use” property. For instance, states may differ on whether a particular activity performed in the state to prepare property for ultimate consumption in another is a taxable use. In a recent case, New Jersey burned J&J Snack Foods (maker of Slush Puppie and the largest soft pretzel manufacturer in the U.S.) on this issue. J&J had received machine parts in New Jersey and assembled them into pretzel-warming machines for out-of-state use. The Superior Court of New Jersey held that assembling the machines was a taxable use of the parts in New Jersey, and it upheld a use tax assessment of over $250,000. That’s a lot of pretzels!
Had the case arisen in Wyoming, a Wyoming court might have found differently on this issue. A recent Wyoming ruling dealt with broadband equipment brought into the state to be prepared for out-of-state use. The Wyoming Department of Revenue held that temporarily storing and sorting broadband equipment in the state was not a taxable use, because the owner would ultimately use the equipment for its intended purpose out-of-state. If the New Jersey court had adopted this reasoning, things might have ended more favorably for J&J.
Conflicting interpretations of “use” may result in the same property being taxed in multiple states, for instance, with two states taking the position that the property is first used within its jurisdiction. To avoid any surprises in this area, taxpayers should pay close attention to the interpretations of states in which they operate and bear in mind: if you use you lose.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do credits for tax paid in another state eliminate the risk of double-taxation resulting from states’ differing interpretations of “use”?
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