Could The Use Tax Bite You?
Many people have never heard of Use Tax, but it could be a tax that just might jump up an bite you!
Use Tax is not something new. It has been around as long as it’s much more famous brother, Sales Tax. Generally, Use Tax is paid to states that charge Sales Tax. The purpose of Use Tax is to equalize the Sales Tax burden between in-state and out-of-state purchases. Sales Tax and Use Tax go hand-in-hand.
Everyone knows that you must pay Sales Tax at the time of purchase to a vendor selling a taxable product in that state. The reason is because it is presumed you will use what you’ve bought in that same state.
If, however, you make purchases in a no-tax state, and then cross the state lines and use your purchase in a state that charges sales tax, or you make your purchase through mail order or on the Internet, they are generally not required to collect sales tax from you. (That is, if they don’t have a presence in your state.) On significant purchases, most people consider this as a savings. By law, it shouldn’t be.
As you might imagine, it is nearly impossible (at present) for a state to require an out-of-state vendor to collect sales taxes if they do not operate any part of their business in that state. Those vendors are outside of the state government’s jurisdiction.
Therefore, Use Tax is expected to be paid by the one making the purchase; the one who will USE the taxable product in that state. Hence, the name, Use Tax. Though that’s the law, it has been near impossible to enforce, since there is no way for the state taxing authorities to know what is being purchased and brought into the state.
However, in theory, Use Tax is a significant source of state revenue for states that charge Sales Tax. But because of the difficulty of enforcement, it has largely gone uncollected. Until now.
With the rapid growth of Internet sales, this potential source of revenue has become more than substantial and the taxing agencies know it. Therefore, these states are starting to collaborate to come up with ways to pull in the “extra” revenue.
Guess who the taxing agencies are targeting first? Yep, businesses. Especially businesses who are already registered to collect sales tax. At this point, they are attempting to threaten a full-scale audit if “voluntary compliance” is not adhered to by businesses who are collecting sales tax.
The states knows businesses are buying taxable products across state lines, as well as via the Internet, just like everyone else. So if these businesses are not reporting Use Tax with their Sales Tax returns, they’ve got them. Several states are sending out letters asking businesses to start reporting out-of-state and Internet purchases from now on. These “requests” are laced with a threat of future audits for non-compliance.
Use Tax applies to purchases that are shipped to you from another state and consumed by your business. It does not apply to purchases you make for resale.
If you are already collecting Sales Tax, it may be in your best interest to start tracking your out-of-state purchases made for your business and remitting your fair share of Use Tax. In most cases, this will not be a large additional expense, and it will help you to stay under the radar of your state’s tax collector’s blood hounds.
If you have already received a notice that you are expected to pay Use Tax, do you have a reliable method of tracking the applicable transactions? QuickBooks, of course, can make it easy.
You may want to check out the video tutorial I just posted on my FREE QuickBooks training blog. It shows a couple insider tips to save you time and minimize the sting of paying yet another tax that bites into your bottom line.
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Gabrielle Fontaine, PB is a freelance Professional Bookkeeper and Certified QuickBooks ProAdvisor. She specializes in assisting Internet-savvy entrepreneurs to get control of their books and maximize profits. Gabrielle also publishes the business-boosting online ezine, Smart Money Choices. Get more information at http://www.BookkeepingDirect.com
