As we are in the heart of tax season, we are reminded of an age-old question business owners frequently ask (and it always has the same answer): “Why do I need a use tax account?” First and foremost, you want to ensure you are in compliance with your state and local tax liabilities. In addition, states continue to focus on enforcing use tax compliance, resulting in painful audits and even six-figure liabilities in some cases.
Use tax is a self-assessed tax that is due to the state in which the product or service is used when sales tax is not paid, but should have been. A good example is when businesses make purchases from out-of-state vendors or over the internet and sales tax is not charged. But liabilities span beyond the internet, including taxable services such as those related to certain computer software services, electronic information, temporary labor and janitorial services. Bottom line: when sales tax has not been charged on a taxable purchase, a business owes use tax.
Here are a few questions and answers worth reviewing regarding use tax accounts.
What is motivating the states to track down non-filers?
All states lose tax revenue every year on individuals and businesses that do not self-assess use tax on purchases that they have made in which the vendor did not charge sales tax. State tax departments know that they can bring in some of that lost revenue if they audit businesses that have operations in their state but do not have a use tax account. The states also know which types of taxpayers to target that tend to generate the biggest audit assessments. Many states have spent considerable time and money to upgrade internal audit identification procedures, and to train new auditors in this area.
How can a state find me?
One likely red flag is when a taxpayer is registered with a state for another business, payroll or sales tax account, but has not registered for a use tax account. Some states may include both sales and use tax in one account, but states such as Ohio require a separate use tax account, making it easier to identify non-filers.
How far back can a state look into my purchases?
Each state has a different statute of limitations. If the taxpayer has a use tax account and has been filing returns, the state can only audit tax returns that fall inside its statute of limitations. Generally states have a three or four-year lookback period.
However, if a taxpayer does not have a use tax account, a statute of limitations has not been established and a state can look back farther. Policies in these situations can vary, from a seven-year lookback period in Ohio to six years in Virginia and eight years in California. Many businesses find it difficult to provide invoices from that many years ago, and if you can’t provide that or some sort of support for a purchase, the state will tax it.
What if I don’t have a use tax account?
Don’t have a use tax account in the states in which you have operations or an office? Consider a Voluntary Disclosure Program with the state. Most states have VDA programs, which offer limited look back periods and no penalties. Interest will typically be charged.
The bottom line is that it is the taxpayer’s responsibility to self-assess use tax on taxable purchases that are not charged sales tax. Taxpayers should have a use tax account for any state in which they make purchases even if they will file “zero returns.” If you do not have a use tax account but think you may need one, before registering with the state contact a member of your service team to help you become compliant.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.