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Don’t Forget Use Tax

Updated: Nov 6, 2023

Don’t forget use tax is a smiling assassin of sales tax compliance. When companies are audited by state tax authorities for compliance with state and local transaction tax laws, it is common for people to focus on sales tax compliance. There is a gotcha that can be more expensive than sales tax mistakes. Did you pay sales or use tax on items that you used or did you rely on vendors to assess tax correctly?

Three major sales tax compliance areas of interest during an audit

Auditors audit three major areas for compliance: (1) did you charge clients the appropriate sales tax? (2) did you remit all of the sales tax you collected from clients? and (3) did you pay sales or use tax on the taxable items purchased by the company? 

Use Tax Defined

A lot of companies have no idea what use tax is or when it is due. The definition of use tax is simple.  When use tax is due is not so straightforward. Use tax is the tax that is due on taxable items and services used by the organization for which the correct amount of tax was not charged by the seller. There are numerous reasons why a vendor may not charge sales tax. The failure of a seller to charge sales tax does not mean tax is not due.

There are several reasons that a vendor may not charge tax on taxable transactions. These include: (1) the vendor is not registered (correctly or not) to collect the tax; (2) the vendor does not understand that tax should be charged; or (3) the vendor uses exemption documentation inappropriately and does not charge tax that is due. Again, there are no free rides. The taxing authority is not going forgive tax that is due simply because a seller incorrectly addressed the matter.

Use tax mistakes may more devastating than a sales tax collection error

The reason that use tax is a deadly mistake is simple. When you fail to charge your customers sales tax, assuming they are still in business, you may seek reimbursement from the client. Although states can tax the purchaser or the seller, it is common that sales tax is the debt of the purchaser. Most companies pay sales tax when it is billed. Use tax is the debt of the purchaser, i.e you. The use tax due will not be reimbursed by a third party. It is the debt of the taxpayer.

Reporting Use Tax– Taxable Purchases Take the Spotlight

Use tax is reported via the sales and use tax return or forms that are designated by the taxing authority. If you are registered to collect tax in a jurisdiction, it is common that a section of the sales tax return is used to report taxable purchases. Use this section to remit taxes due on purchases of taxable items and services when the seller does not collect the appropriate tax.

There are instances in which companies are not registered to collect sales or use tax because they do not sell items or services that are subject to tax. Registration rules vary by jurisdiction. In any case, if you do not file sales tax returns, it is common that state tax authorities provide forms or an electronic mechanism to allow the report and remittance of use tax on purchases. Research the matter, remit the report and funds, and maintain all related data for the pertinent statute of limitations in case of audit.

For an online class on how to complete a Texas sales and use return, including instruction on how to remit Taxable Purchases, visit Understanding Your Texas Sales and Use Tax Return.

Common compliance issues

People usually get large assessments when one or more of the following have occurred.  Keep in mind that taxability varies by jurisdiction. All examples may not apply to you. 

Activity that generate use tax issues include:

  1. Large purchases: When making large purchases it is imperative that you pay the tax correctly. Examples of large purchases are the new construction, remodel, repair, or restoration of real property.

  2. Recurring purchases:  When consuming a good or service over a period of time, related tax can snowball. Examples include the purchase of software as a service…some states do tax this! Other examples include landscaping or janitorial services.  You must know your tax responsibilities. They vary by jurisdiction.

  3. Internet purchases: Some sellers are not permitted to collect tax in your state. That does not mean that tax is not due on the item that you purchased. Examples of internet purchases that can lead to an issue are purchases of software, office supplies, furniture, paintings, etc.

Use tax is an important issue that is routinely emphasized by tax authorities and dismissed by almost everyone else. It is common to make mistakes in matters of compliance. Don’t let this compliance area go unrecognized or get out of control. Budget the tax, document it was paid, and move on.

For more on taxable purchases, visit Taxable Purchases Made Easy!

For a private consultation, schedule a call with us.


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