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 need to consider your company’s obligations as part of your tax strategy – or 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, to save you time and money in the long run.
Understanding Business 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 use tax differs from sales tax
Sales and use taxes have the same basic goals, but the major difference is how they’re applied. Where sales tax is the responsibility of the seller, business use tax 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. On the other hand, use taxes are 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 is to register for a permit. This applies to 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. This may be a certain sales threshold, or a physical presence in a state, like offices or warehouses. Alternatively, your state might be part of the Streamlined Sales Tax (SST) agreement, which would allow 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 business use tax
Often, the use 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 with automatic tax calculators is very helpful. 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, to ensure you comply with the correct regulations per state. This includes details on the items you’ve purchased. For example, 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
As a business owner, you might trigger use taxes on out-of-state purchases. If your company buys equipment, office supplies, software licenses, or other goods from an out-of-state seller that doesn’t charge your state sales tax. By using or storing these goods in your state, you’re required to pay tax to your state revenue department.
For example, say your company is based in California and you purchase equipment from Oregon. Because Oregon doesn’t levy sales tax, you’ll pay use tax to the California state government.
Note that this also applies to online purchases from retailers that don’t collect sales tax in your state.
Reporting and remittance
When reporting business use tax, you’ll do so on your corporate tax return, along with your sales tax records. 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, to avoid penalties.
But penalties aren’t the only possible outcome of miscalculating this tax.
Common Pitfalls to Avoid
Because paying business use tax on purchases is your responsibility as a buyer, 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 forget to assess and pay this tax. After all, corporate taxes are already notoriously complicated.
To avoid this, ensure that your business regularly reviews any purchases made and see whether you need to pay it.
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 any of your taxes 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. 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 compliance and reporting, while you focus on what matters; your bottom line.
We can help you!
At Fusion CPA, our team of accounting and tax experts has years of experience in multi-state accounting and tax compliance. We know all about the changing laws, and how best to maximize your returns to save you time and money. So if you need help navigating your multi-state financial reporting or calculating your taxes, 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.
