If your business provides goods and/or services to others, you’ll know all about the complexities of sales tax. But did you know that every state which imposes sales tax also levies use tax for purchases made outside of the state? This means that you must consider your company’s obligations for this tax as part of your strategy. Otherwise, you’ll face the penalties of non-compliance.
In this blog, we’ll walk you through everything you need to know about use tax. That way, you’ll have the knowledge you need to ensure your business accounts for this in your tax strategy. Our goal is to save you time and money in the long run.
Understanding Use Tax
This is a state-imposed tax on any goods and services purchased outside your home state and brought back to be used, stored, or consumed in-state. In other words, it’s levied against products or services not subject to sales tax because the sellers don’t have nexus, like when a purchase is made online.
It was introduced to make sure that all goods and services purchased in a state are taxed fairly, no matter where they’re bought. That way, state governments can protect their revenue, and ensure a fair playing field for local retailers.
It is usually levied by the state in which the goods or services are used.
How it differs from sales tax
Sales tax and use tax have the same basic goals, but the major difference is in how they’re applied. Where sales tax is the responsibility of the seller, the latter is your responsibility as a purchaser.
Sales tax applies at the point of sale, and is collected by the seller. Thereafter, they remit it to the government. Use tax, on the other hand, is self-reported by your business on items used or stored in a state where sales tax wasn’t applied.
Compliance with Regulations
The first step to ensuring compliance with regulations is to register for a permit. This applies for any state in which you have nexus – or significant economic activities – no matter which state your business is actually located in.
Keep in mind that nexus can have different triggers depending on the state in question. Sometimes this is a certain sales threshold in an area, or a physical presence in a state, like offices or warehouses. Alternatively, your state might be part of the Streamlined Sales Tax (SST) agreement, allowing you to register for multiple states at the same time. As such, it’s best to check with the pros to see what the requirements are for your business.
Next, you’ll need to ensure that these permits are kept up to date. Once again, the renewal procedures and requirements may differ by state. Some states require annual renewals by a specific deadline, while others only need you to update information if your business details or activities change. We recommend factoring these considerations into your year-end tax planning strategy.
Calculating and remitting use tax
Often, the tax rate for a state will be the same percentage as the sales tax rate. But on top of this, you may be subject to local rates, which can complicate your calculations. Accounting software that features automatic sales and use tax calculators can greatly assist with this. Alternatively, you can consult with a tax professional to double check your calculations.
Either way, it’s essential that your business keeps accurate records of all purchases. That will help you to ensure you comply with the correct regulations per state. This includes details like when they were bought, the intended use, and seller data. It’s also a good idea to implement strict internal controls to ensure that your finance team can conduct regular compliance reviews, and avoid the pitfalls of incorrect information.
Common Scenarios Requiring Payment
You might owe this tax if you make an out-of-state purchase, if you buy equipment, supplies, software licenses, or other goods from a seller that doesn’t charge your state sales tax. By using, consuming, or storing these goods in your state, you’re required to pay use tax to your state revenue department.
For example, say your company is based in California and you purchase equipment from Oregon (which does not levy sales tax). You’ll need to calculate and pay use tax to the California state government.
Note that this also applies for online purchases from retailers that don’t collect sales tax in your state.
Reporting and remitting
When it comes to reporting use tax, you’ll do so on your corporate tax return, along with your sales tax returns. List all qualifying purchases along with the appropriate tax calculation based on your local rate. This needs to be submitted during the same periods you’d submit sales tax filings, in order to avoid penalties.
But penalties aren’t the only possible outcome of miscalculating use tax.
Common Pitfalls to Avoid
Paying this tax on purchases is your responsibility as a buyer. As such, the IRS expects you to know exactly what’s expected of you when it comes to filing and paying your taxes. And that comes with a degree of responsibility. Often, businesses simply forget to assess and pay use tax, especially because corporate taxes are already notoriously complicated.
You must ensure that your business regularly reviews its purchases – particularly from out-of-state on online retailers – and see whether they require you to pay use tax.
Of course, this requires effective tracking and documentation of all your purchases. And that means you need policies governing how this is done.
Underreporting or not paying use tax can land you in very hot water. Not only will you likely face penalties and fines, but it could lead to a higher chance of your business being audited.
Thankfully, technology can help you here. But so can accounting pros. For example, they can help you set up internal controls to ensure compliance. Or, they can do the heavy lifting for you. By outsourcing your accounting, someone else can worry about the details of compliance and reporting while you focus on what matters; your bottom line.
We can help you!
At Fusion CPA, our finance experts have years of experience in multi-state accounting and tax compliance. We know all about the changing laws, and how to maximize your returns. For help navigating your financial reporting or calculating use tax, schedule a free Discovery Call with our team.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.