As a former sales tax auditor with the State of California, one of the first things I would do when I began a new audit was to sit down with the taxpayer’s lead accountant to discuss how they reported sales tax. After all, they were accountants; they understood what sales tax was… Next, I would discuss how they ensured compliance with use tax. Most often, they would look at me with blank stares.
Unless you operating a small, single location retail outlet, understanding what use tax is – and how it’s related to sales tax – is absolutely critical to ensure that you don’t get an unpleasant surprise from your next tax auditor. Depending upon the size and scope of your business, failure to properly self-accrue use taxes on self-consumed purchases of tangible personal property or collect and report use tax on sales made in interstate commerce (under certain conditions) can significantly increase your potential tax liability.
Auditors can often spot potential liability by looking at:
- Reported purchases subject to use tax. No reported use tax purchases, especially at larger businesses is often a red flag;
- Withdrawals from resale inventory. If you held property in resale inventory that you made any use of prior to making a sale in the normal course of business, you may have incurred a liability;
- Failing to collect use tax on retail sales of property shipped from one state to purchasers located in another state where you are considered “engaged in business”.
Conversely, some businesses overreport their use taxes by failing to understand how sales and use taxes relate to each other.
With this initial blog entry, I solely wish to convey why it is important to understand what use tax is all about. In subsequent entries we’ll explore more about where hidden use tax liabilities may exist and how you can effectively manage them.
Questions? Comments? BTW – please feel free to suggest use tax topics that are most relevant to your industry.