Preface: An often bewildering and overlooked area of tax compliance is sales and use tax. This blog is to increase the awareness of addressing these risks in a proactive manner with your tax advisor(s).

 

Ascertaining Before Audit Your Business Sales and Use Tax Compliance Risk(s) Is Advised

Sales tax is an increasingly important tax compliance area for many businesses. Sales tax can be charged at more than just the state level. 45 states impose sales and use tax on purchases of tangible goods, and 4,696 cities and 1,602 counties also impose sales tax. If you’re conducting business across state lines, you should assess your nexus for jurisdictional sales and use tax compliance risk(s). More importantly for your customers, these sales tax deductions continue to be an itemized deduction on Schedule A with passage of 2015 “tax extenders” bill, coined the Protecting Americans from Tax Hikes (PATH).

Sales tax is often assessed on the retail level for sales of inventory or services, or transfers and exchanges of taxable inventory or services. All sales are presumed taxable at the retail level unless proven otherwise. Sales tax is added to the price of the product or service and remitted to the state by the seller who charges and collects the tax, e.g. your business purchases a new snow blower from Millers Hardware Superstore, sales tax is charged on the sale, and the seller, Millers Hardware Superstore, remits that sales tax to the state. The complexity begins with special sales tax rules state-to-state specific on inventory items or services. Investing in sales tax compliance assurance is advised for every business.

Use tax on the other hand, is a tax on the use or consumption of a taxable item or service that no sales has been charged or paid. The tax often applies to purchases made outside the state and used in the state, e.g. you live in Pennsylvania and purchase a snow blower in Delaware from say Home Depot, you need to pay use tax on the purchase. Use tax also applies to goods initially bought exempt from sales tax, but used for a non-exempt purpose. Use tax can be self-assessed and paid to the state, or collected from the customer from an out-of-state vendor registered with the purchaser’s state. Investing in use tax compliance assurance is advised for every business.

Use tax rates are the same as sales tax rates. Use tax levels the playing field for in-state vendors from pricing advantages of purchasing in sales tax free zone. States with budget concerns are now placing more scrutiny on sales tax with expanded jurisdiction on out-of-state vendors, increasing audit aggressiveness, expanding the tax base to include more inventory items and services, and sometimes increasing the tax rates.

The seller is primarily responsible, and liable for collecting and paying the sales tax, whether they have collected the tax or not on the sale. Most often, a vendor must collect tax with respect to taxable sales unless the customer or client shows a valid exemption certificate. If the seller fails to assess sales tax, the state can proceed to collect that tax either from the seller, or purchaser. Yet, often the vendor pays the tax as an additional expense in instances where collection is overlooked. This can be expensive. While the vendor has the right to collect from purchaser, it may be impractical, or imprudent. Even if the vendor is fortunate enough to collect the tax from the customer(s), after the fact, the penalties, interest, and cost of collection can be steep.

Summary: If your business sells inventory or services, be cautious to adhere to proper sales and use tax guidelines and regulation, collecting and remitting the appropriate tax(es) on applicable sales. Talk with a tax expert for sales and use tax assurance, especially when adding new inventory items or services in your business, or selling into foreign tax jurisdictions.