Articles & Alerts
Trade Shows and Product Samples Can Create Unintended Sales Tax Exposure
As trade shows have been ramping up following the pandemic hiatus, now is a great time to review the sales tax rules in connection with attending a trade show and giving away product samples. While each state has specific rules, nuances and exemptions, understanding the basics will help protect you and your business from unexpected tax liability.
Generally, a connection, or nexus, between a taxing state and a business must be established in order to necessitate compliance with a state’s tax regime. More often than not, physical presence within a state is enough to create that nexus, particularly with respect to sales tax. When attending a trade show, a business has boots on the ground; this may be problematic from a sales tax perspective as it can obligate the business to begin collecting tax on its sales of goods in the state throughout the year.
The possibility of sales tax nexus exposure would significantly discourage trade show attendance and reduce a state’s economic benefits from the sales of hotel rooms, restaurant meals and show tickets. For this reason, many states provide nexus exceptions for trade show attendees provided certain criteria are met, such as a cap on the total number of in-state days during the year or limiting the volume of sales a business can transact at the show. State rules vary on these types of conditions and thresholds, so businesses need to pay close attention to the respective state regulations. For example, New York provides a 14-day limit on tradeshow participation before a sales tax nexus is established as long as no in-state sales are completed during that time. However, California permits up to 15 days of in-state trade show days and a $100,000 threshold on gross income activity at the show.
A common sight at trade shows is the distribution of product samples, which also require special awareness for tax purposes. While sales tax typically applies when a sales transaction occurs, thereby negating a tax obligation on a product giveaway, a business may nevertheless be liable for use tax on the promotional freebie. Use tax is the counterbalance of sales tax in that if sales tax is not paid when purchasing a taxable object, the purchaser has a responsibility to remit use tax instead. With regard to product samples, if these products were purchased as part of a business’s general inventory for resale, it is likely that no sales tax was paid on the goods because of the resale exemption. Accordingly, when these items are withdrawn from inventory and given away at a trade show, they would escape sales tax. For this reason, businesses are required to pay use tax, in place of the missing sales, on product samples taken from their inventory and used for promotional purposes at the show.
Businesses must be thoughtful of their sales tax exposure when participating in trade shows and providing product samples. By being physically present in a state, a business is potentially exposing itself to additional tax compliance obligations, especially if state exemptions and limitations are exceeded. Furthermore, failing to properly consider the tax implications of promotional samples may lead to an unexpected and sizable tax bill if audited.
If you have questions about your business’s sales tax responsibilities at trade shows or when dispensing product samples, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.