States are suffering from a $23 billion deficit annually in uncollected use tax. It is the unknown companion of sales tax, but that makes it no less important. With only 2 percent of taxpayers reporting it, businesses are losing out in the long run.
States are looking to businesses to close this deficit gap. It is much harder to enforce use tax on individuals, so companies are facing the brunt of the pay up. In fact, the susceptibility of companies to overlook use tax is high and auditors are quick to jump on it. State auditors actually say it’s the number one audit risk for businesses.
Don’t get caught with your compliance down. This quick rundown of the basics will get you up to speed and on task.
What is use tax?
There are two types of use tax: consumer use tax and sellers use tax. Although both are important to know, the one most affecting businesses is usually consumer use tax. This tax is most often applied when purchases are occurring across state lines. If a sales tax was not required in the purchaser’s state, a consumer use tax is often applied. Consumers are not always individuals either, sometimes it’s a business or a seller who owes the tax. If you didn’t pay a sales tax, or paid a lower one that your state requires, you are required to pay a consumer use tax.
For example: A business in California purchases pens from Pennsylvania through the mail. The pens arrive in California via common carrier and the invoice contains no sales tax. Since the pens would have been subject to sales tax in California, the business must self-assess and remit the use tax due on the purchase to the state of California.
Know your rate
If your state has a sales tax, it has a use tax. All 45 states with sales tax do. Often these rates are the same, but don’t bet on it. Although federal law states that use tax cannot exceed the rate of sales tax, some states still impose a higher use tax. You may be confident that you know the sales tax rate in your state, but also confirm the use tax rates before you find yourself in the midst of an audit.
Do you owe?
Luckily, certain exemptions also apply to use tax. Manufacturing equipment is one of the most common ones, typically use tax is not due on equipment used to manufacture other goods. However, each state can have specific rules. Keeping track of each exemption and their distinctions can be difficult, but is important for your business in the long run.
Luckily, some states require vendors to notify their customers of use tax requirements. For example, Oklahoma and South Carolina require a use tax notification on all websites, catalogs and invoices. North Dakota one ups this by also requiring notices on purchase orders and packing slips. Due to an unfavorable compliance burden that led to a lawsuit, Colorado requires retailers to annually submit a detailed report to the Department of Revenue of all in-state customers and sales.
As a business, your obligations around consumer use tax can be difficult to manage. Get perspective by reading What’s the Use of Use Tax? Five Tips for Consumer Use Tax Compliance. This paper provides best practices for compliance including sound rationale for automation – something that can easily be done in your ERP, accounting or ecommerce system with software like Avalara AvaTax.
Read Avalara’s FREE white paper here! What’s the Use of Use Tax? Five Tips for Consumer Use Tax Compliance