Understanding D.C. Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in the District of Columbia.
The District of Columbia assesses a 6 percent sales tax on the retail sales price of tangible personal property. So, if your business buys, sells or uses tangible personal property in the District of Columbia, a sales or use tax liability will probably be incurred. (Higher rates apply to sales of alcoholic beverages, restaurant meals and alcoholic beverages, parking and hotel rooms.)
You calculate sales taxes by taking the tax rate and multiplying it by your gross receipts. Gross receipts are based on your total retail sales or tangible personal property transferred to your customers through the services you provided. The District allows you to take a credit against use tax if you have already paid sales or use tax to another state on the property purchased. This credit cannot exceed the amount of sales tax assessed in the District of Columbia.
The District requires you to obtain reimbursement for this tax from your customers. So, if you fail to remit the correct amount of taxes on a given transaction, the District can go directly to your customer and collect the right amount of tax. While going after each purchaser to collect the right amount of sales tax may be impracticable, the District clearly intended to reserve that right for itself.
While the seller is responsible for paying the sales taxes to the District, but the law requires the seller to pass the actual cost of the tax on to the buyers. State law does not allow you to pay the tax out of your pocket — what's referred to as absorbing the tax.
D.C. Does Not Tax Most Services
In the District of Columbia, you may provide most services without incurring any sales tax liability for the service. However, this exclusion from tax does not extend to all service providers. And for certain goods and services, the tax rate varies from the general rate, so check with the Office of Tax and Revenue for more details. If you provide any of the following types of services, you will incur a sales tax:
- lodging for less than 90 days
- repairs, alterations, mending or fitting personal property or applying or installing personal property as a repair or replacement
- copying, photocopying, addressing, and mailing services
- laundering, dry cleaning, or pressing
- parking, storing, or keeping motor vehicles
- deliveries within the District when separately stated
- employment services
- real property maintenance services (including cleaning, maintenance and repairs)
- landscaping services (including landscaping design and architectural services)
- data processing services (including entering, processing and maintaining data and information by a third party)
- information services (including the furnishing of general or specialized news or current information by printed, mimeographed, or electronic means)
D.C. Taxes Leases of Personal Property
In general, all leases and rental agreements involving tangible personal property are treated as sales. As a result, leased and rented property is subject to sales tax. However, if your business rents or leases films, records, or any type of sound equipment to theaters and radio and television broadcasting stations, these transactions will be exempt from sales or use tax.
Certain Sales Are Exempt from Tax
The District of Columbia allows exemptions from sales tax based on the type of transaction (such as a resale exemption), the nature of the organization purchasing the product (such as a charitable organization), or the type of product (such as food and drink that is not snack food or sold for immediate consumption).
In addition, the District provides a resale exemption to you if you're a service provider who purchases tangible property that will be transferred to your customers as incidental to the provision of your services. If you want this exemption, you must present the seller with a valid resale exemption certificate that contains an active registration or resale number.
Purchases for Resale Are Tax-Exempt
If you purchase goods or products and will resell them in your business, or include them as part of the service you provide, you may claim a resale exemption from sales or use taxes. However, you will have to collect sales tax from your customers when they purchase the goods or products.
Resale exemption certificate may be required. In order to obtain a resale exemption, the seller may require you to present, in good faith, a resale certificate. Although the District provides a specific certificate form for you to use, you're also free to develop your own resale certificate document. The resale certificate document should contain the following information:
- the buyer's and the seller's name and address
- an indication of the general character of the property purchased (e.g. "For resale as tangible personal property in the same form as received from you.")
- the buyer's and seller's District of Columbia certificate of registration number
D.C. Allows Blanket Resale Certificates
The District of Columbia allows blanket resale certificates. A blanket resale certificate is a resale certificate that the buyer provides to a seller from whom the buyer makes numerous exempt resale purchases. The idea is that by providing a blanket resale certificate, both the buyer and the seller can avoid the hassle of having to deal with a new certificate every time you make a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, the buyer should present, in good faith, a blanket resale certificate to the seller that includes the same information as a regular resale certificate. A blanket resale certificate will be valid until either you or the Director of Finance and Revenue revokes it in writing.
Use tax liability on out-of-state purchases.
If you buy taxable property from an out-of-state seller, you're going to have to pay a use tax on the purchase price of the property. If the seller you made the purchase from is authorized by the District to collect the use tax, he can collect it. If the seller is not authorized to collect the use tax, you should pay this tax directly to the District.
Physical Presence Required for Tax Liability
If you are an out-of-state retailer, you will be responsible for paying sales tax only if your business has physical presence within the District of Columbia. To determine if you have a physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse or any office space in the District of Columbia? Maintaining retail or warehouse facilities means that your business has a physical presence within the District. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the District.
- Do my employees or I enter the District of Columbia for purposes of taking and transmitting orders from customers in The District of Columbia? If your employee or independent contractor enters the District of Columbia for purposes of taking or transmitting orders, your business has a physical presence in the District of Columbia. But, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the District.
- Do my delivery vehicles frequently enter the District of Columbia for purposes of delivering property? Frequent deliveries in the District of Columbia by your trucks will give you physical presence in the District of Columbia. An occasional delivery, however, may not constitute a physical presence within the District.
Claiming a refund of overpayment for sales and use taxes
If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you or your customer discover such an overpayment, the District allows you or your customer to file a claim for a credit or refund. You or your customer should submit the claim on forms furnished by the District of Columbia Department of Revenue. The District will normally issue a credit memorandum rather than give a refund to the person who made the erroneous payment.
Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the District will not approve it. Also, the District of Columbia will not provide you with a refund until after you have repaid the purchaser for the amount of tax that was originally paid.
D.C. Imposes Use Tax on Out-of-State Purchases
In order to avoid losing tax revenues on sales transactions taking place outside the District, the District of Columbia also imposes a use tax. The use tax is assessed against all persons who store, use, or otherwise consume tangible personal property in the District of Columbia that was purchased outside of the District. If the out-of-state seller you purchase property from is a registered retailer in the District of Columbia, you should pay the use tax to the retailer. If the retailer is not registered in the District of Columbia, you should pay the use tax directly to the District.