Understanding state and local sales tax for vending machine and micro market operators

Getting into the vending and micro market space can be a lucrative and rewarding business for aspiring entrepreneurs. With a small amount of capital, a willingness to build relationships, and a commitment to do the work necessary to keep clients happy, you can open a business fairly easily. But like any business, some challenges and obstacles will present themselves. If not managed properly, they can derail even the best laid-out plans for success.

One of the biggest challenges that owners face is understanding the complexities of sales tax compliance, especially when operating across multiple cities, counties and states that have very different tax rules. In just the last few years, there have been close to 2,000 tax rate changes annually along with numerous tax law changes. More are sure to come.

Most small business CPAs are not well versed in sales tax requirements, especially with products sold through a vending machine. Due to these complexities and the limitations of their accountants' know-how, many operators are miscalculating their sales tax obligations. This results in sales tax overpayments or risks exposing operators to potentially costly audits and penalties. In either scenario, it means less money in your pocket and potential legal liability.

This article answers key questions about sales tax and can help demystify some of the beliefs and practices within the vending industry.

Who owes sales tax?

Many vending machine owners think of sales tax only in terms of the tax you pay to a retailer when purchasing products. But, the sales tax requirements associated with vending machines are much different than those of ordinary retail transactions.

Unlike a retail transaction — where the sales tax is charged on top of the sales price — vending machine sales have the sales tax embedded in the price. It is the vending machine operators’ responsibility to remit the sales tax.

In addition to registering to collect sales tax, most states require vending machine owners to obtain a license, or permit, to operate their machines. The owner of a micro market (or other unattended retail outlet) also is considered to be a retailer and is required to register with the applicable taxing authorities for the collection of sales tax.

Once registered, the vending machine owner is required to calculate sales tax on all vending transactions. Typically, the sales tax amount is included in the selling price. The owner determines the sales tax amount by applying a state-specific calculation formula. The usual method is to calculate the sales tax from the embedded sales price using the method prescribed by the jurisdiction.

Generally, all products sold through a vending machine are taxable — even food in many states. Some states have specific regulations related to which products sold through a vending machine are subject to sales tax. These are based on the type of product that is sold (i.e., soda, juice, snacks, candy, gum, salad, sandwich, etc.), and the taxability of these products can vary by state depending upon the ingredients. For example, juice that contains less than 10% natural juice is taxable in many states, but that can vary based on the actual concentration of juice. Unfortunately, tax laws change across the United States numerous times throughout the year with little warning.

When is sales tax due?

Considering the complexities of sales tax regulations, how does a micro market or vending machine owner or operator determine what products are subject to sales tax? The most accurate method is to review the state sales tax laws published on the taxing authority’s websites. This can be a difficult task, however. It can be highly inaccurate and often does not reflect specific taxing authority rules. Many owners will seek advice from a local CPA firm, but most of these firms do not have the requisite sales tax experience.

After determining the taxability of the products to be sold in the vending machines, the next requirement is to calculate the amount of sales tax owed to the taxing authority. It is important to understand the specific tax calculation formulas for the state in which you own and operate a vending machine. Some state laws define some products sold through vending machines as a “meal,” which has a different tax treatment. For example, a ready-to-eat salad is defined as a meal in Massachusetts and is subject to the state sales tax rate as well as the local meal tax rates.

A few states apply only the local sales tax rate to food items. Other states have specific tax calculation formulas based on the type of product, like “food” and “non-food,” and based on the location of the machine.

What about sales tax returns?

The complexities of the tax calculation often transfer to the preparation of the sales tax returns. Each state has its own format regarding how gross sales, taxable amounts, exempt amounts and the tax collected need to be reported. States with local tax rates tend to be more complex. For example, in approximately 60% of the states, sales taxes need to be properly reported to the local taxing authorities in addition to the state.

The frequency of fillings also varies by state and depends upon the amount of sales tax collected during the year. The first-year owner’s filing will generally be annual because the state does not have any history of sales tax collected by the newly registered taxpayer. The frequency of filing often changes after the initial year of operation, however, once a tax history is created. The amount of sales tax collected may move the taxpayer to a different category, requiring the reporting frequency to change to either quarterly or even monthly.

Most vending management software (VMS) does not provide features to reduce the burden of calculating and reporting sales tax, unfortunately. Some VMS applications can store sales tax rates in their systems; however, it is the owner's responsibility to supply and maintain the correct sales tax rate.

A few VMS solutions include a feature to store tax jurisdiction information — for instance, the machine location and a sales tax rate based on that specific location — although none of the solutions provide sales tax rates. Also, none of the VMS systems include the sales tax calculation rules, the sales tax filing requirements, or the ability to define the taxability of individual products sold in a vending machine. Therefore, the burden is on the owner to make all these adjustments before filing and remitting sales tax.

In summary, sales tax rates and taxability of products are extremely complex within the United States. Very few tools or software applications support the calculation and reporting of state and local sales tax. Many CPA firms do not have the knowledge or tools to accurately or effectively calculate sales tax and prepare the applicable tax returns.

What are the costs of not calculating sales tax correctly?

• Reduced profits by paying too much in sales tax.
• Tax and legal exposures by underpaying, risking expensive audits and fines
• Increased business management costs as staff must spend time supporting the sales tax requirements.

The calculation, collection and reporting of sales tax is quite complex. It is important to either understand the tax laws or find a reliable tax compliance resource.