Sales tax collection obligations may arise in some states based on the services you provide, including data processing, bookkeeping, consulting, or payroll. Whether the services or data you provide are taxable is a subject worth exploring, but there is another important piece of the transactional tax puzzle to consider: use tax compliance for your firm.
Use tax is a transactional tax imposed on the use, storage, or consumption of tangible personal property and taxable services in a state. The use tax applies when no sales tax was paid on a purchase of otherwise taxable objects. The use tax base, exemptions, and rates generally parallel the sales tax.
What does the use tax have to do with your accounting practice? Conceptually, use tax applies to all purchases made in a sales tax state where no sales tax was collected, including purchases by individuals and businesses. So, whatever goods or services you buy for your own consumption that are taxable at your location are subject to sales tax on the sale, but if no sales tax is collected, a use tax is due. This may be intuitive, but keep in mind that the application of use tax to what you buy is not directly related to the application of sales tax to what you sell.
Bottom line: Even if what you sell is not subject to sales tax, the things you buy may be subject to use tax.
Because use tax focuses on the expense side of your income statement, look at the types of things your company spends money on: payroll, lease payments, professional licenses, utilities, training, and probably a lot more software than you bought 10, or even 20, years ago. Payroll, leases, and mortgages or professional license fees are excluded from the use tax base, but utilities, training services, or software are often subject to sales or use tax.
Utilities are chartered by the state, so it’s probably safe to assume your electric provider, for example, is charging your company all the appropriate taxes due on those bills, including applicable sales tax. However, when it comes to purchases of continuing professional education training or software purchases, whether your provider charges sales tax is mainly determined by the provider’s business activities in your state.
Put another way: If your provider does not have nexus in your state, that vendor is not obligated to collect sales tax from you. Or, even if it has nexus, the provider’s sales tax compliance regime may be less than reliable and no taxes are collected on sales to your company. Under any circumstance, if you do not pay sales tax on taxable objects when you buy them, your company owes use tax on their purchase price.
Taxation of training services is not universal, and frankly, the dollar amounts involved may not even be material. On the other hand, your annual software licenses, support, and update fees likely are. Accounting and bookkeeping has been transformed by software applications, but those tools come at a cost. Software delivered through a tangible medium is subject to sales or use tax in virtually all US sales tax states. Software delivered electronically is taxable in a majority of states, and cloud-based software (Software-as-a-Service) is treated with a patchwork of state interpretations, the result being that many states tax cloud-based software access.
The bottom line: Most software transactions are subject to sales or use tax in most places.
Accountants and bookkeepers are significant consumers of software products. Let’s be honest, in the last quarter century, most practices’ purchases of pencils and notepads have virtually vanished, while invoices for software now fill your mailbox. In many cases, software vendors are able to deliver their products and services remotely. The Internet provides an efficient channel for them, often relieving them of the need for “boots on the ground” in your state.
In the realm of sales tax compliance, this lack of presence in a given state releases a vendor from its obligation to collect sales taxes. When a vendor sells your company a taxable object, but does not collect tax, your company is obligated to remit use tax on the purchase price. Note there is a theme developing here … .
Finally, there is something else going on in this space. Software, especially cloud-based software, is a new shiny object for many auditors and regulators. Any time a slice of products or services makes a splash in the marketplace, there is increased focus on that area. The prevalence of software and technology providers among the most successful companies in the economy adds more interest. That said, use tax audits are rarer than their sales tax cousins, and perhaps the amount you spend on taxable objects is minimal. However, it’s also important to remember that periods where your company does not submit a use tax return are open indefinitely and may reflect a reportable potential liability.
The takeaway? The best initial approach is to gain knowledge about the purchases you make. Are the things you buy taxable? Are you paying sales tax? This sort of awareness will help your practice make important decisions about use tax compliance, as well as improve the general knowledge of your staff regarding sales and use tax compliance in your state. It will also give your company positive insight into the manner in which you are being treated by your vendors. After all, if an item is not taxable in your state, but you are paying sales tax, this exercise may pay for itself by reducing unnecessary costs.
Use tax compliance may be at the bottom of your list of day-to-day concerns, but an analysis of your potential use tax obligations will provide broader benefits in increased knowledge around the office, an improvement in the quality of advice your staff provides to your clients, the elimination of outstanding use tax obligations, and maybe even confirm your vendors are treating your company right, or wrong, when it comes to sales tax compliance.
Shane is a Senior Manager in the State and Local Tax Department at Clark Nuber, P.S. in Bellevue Washington. Shane focuses on state and local indirect tax obligations for companies of all sizes operating across the United States and...