Use Tax Exposure is Like Breathing??
Use tax exposure is like breathing for humans. If you are alive you are breathing. If your company is conducting business, it has use tax exposure. (I apologize for the analogy, its the best I could come up with). Why does every business have use tax exposure?
Every purchase a company makes may or may not be taxable. If the purchase is taxable, then sales tax should be charged by the seller. But, wait, that doesn't always occur. Why not? Well, sellers are not required to charge the purchaser sales tax unless they have nexus in the state where the sale occurs. Therefore, if your company, as the purchaser, buys something that is taxable, and the seller doesn't charge sales tax, your company is required to self-assess use tax and remit it to the state.
A common item of use tax exposure is Internet purchases. Generally, Internet retailers do not have nexus in most states. Therefore, they are not required to charge sales tax to purchasers. However, all purchasers are required to self-assess use tax and remit it to the state, if the purchase is a taxable purchase.
In addition to Internet purchases, any taxable purchase from any vendor could create use tax exposure.What should companies do to limit their use tax exposure?
Companies should provide adequate guidance to individuals who are responsible for reviewing invoices and purchases to determine if the purchase is taxable, and if use tax should be self-assessed. A common tool is a sales and use tax decision matrix which is customized to a company's purchases. The matrix would list the items that are purchased, and provide state by state authority for whether the item is taxable or not. Therefore, when the individual responsible for reviewing invoices reviews an invoice that contains a taxable item, and no sales tax is being charged on the invoice, the individual would know that use tax needs to be self-assessed and remitted.
In addition to the matrix, or in place of the matrix, a sales and use tax software solution may make sense as well. It just depends on the facts and size of the company.
Companies can also talk to their vendors to confirm that they should or should not be charging sales tax. Sometimes vendors are not charging sales tax when they should be. On the flip-side, sometimes vendors are charging sales tax when they shouldn't be. This could be due to exemptions, resale certificates, etc.
Minimize Exposure and Obtain Refunds?
With the states hurting for revenue and becoming more aggressive, it is recommended that your company take action to minimize your company's use tax exposure before the auditors arrive. Who knows, not only may you minimize your use tax exposure, you may also find that you have overpaid or self-assessed use tax on items that were not taxable or on items you resold to your customers. In that case, your company would be entitled to a refund of the use tax paid.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.