Understanding Use Tax Responsibilities (And Common Mistakes to Avoid)

Business today isn’t confined by state. In fact, it’s interconnected across many jurisdictions. That’s a great thing. More markets, more business for us all. But, as you know, there’s always that little issue of multi-state tax compliance that must be addressed. And one area of compliance that can be overlooked is use tax.

Use tax is often misunderstood, with many businesses assuming that only sales tax applies to their transactions. However, use tax plays a critical role in ensuring that all taxable purchases are taxed appropriately, even when sales tax is not charged at the point of sale. This guide delves into the fundamentals of use tax for businesses and details some common use tax mistakes to avoid.

Here's what we’ll be covering:

1. What is Use Tax?

• Definition and key points regarding use tax obligations.

2. The Difference Between Sales Tax and Use Tax

• Comparison of sales tax and use tax, including who is responsible for each.

3. Common Scenarios Where Businesses Are Liable for Use Tax

• Examples of situations that can trigger use tax liabilities.

4. Common Use Tax Mistakes

• Common errors businesses make in use tax compliance.

5. Impact of Use Tax Mistakes

• Financial and legal repercussions of use tax errors.

6. Mistakes on Tax Returns: Identification and Prevention

• Strategies for identifying and preventing use tax mistakes.

7. How to Fix Tax Mistakes

• Steps for correcting errors in use tax reporting.

8. Consequences of Late Tax Filing

• Penalties and risks associated with late filing of use tax returns.

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. What is Use Tax?

Use tax is a tax imposed by state or local governments on the use, storage, or consumption of goods and services when sales tax has not been collected. It is designed to ensure that purchases are taxed appropriately, regardless of where or how they are made. If a business buys goods from an out-of-state vendor that does not charge sales tax, the business is responsible for paying use tax to the state in which the goods will be used.

While the seller collects sales tax at the time of purchase, use tax is self-assessed by the buyer and remitted directly to the state or local tax authority. Use tax typically applies to tangible personal property but may also extend to certain services, digital products, and other non-physical goods, depending on the jurisdiction.

Key Points:

• What triggers use tax? Use tax is due when sales tax was not collected at the time of purchase.
• Who pays? The buyer, not the seller, is responsible for remitting use tax.
• Purpose: To level the playing field between in-state and out-of-state sellers by ensuring that all taxable goods are properly taxed.

2. The Difference Between Sales Tax and Use Tax

Understanding the distinction between sales tax and use tax is crucial for businesses. While both taxes aim to ensure that taxable transactions contribute to state revenues, they apply in different contexts and have unique compliance requirements.

Sales Tax:

• Collected by the seller: When a business sells goods or services to a customer, it charges sales tax at the point of sale if the transaction is taxable.
• Seller’s responsibility: The seller must calculate the correct sales tax, collect it from the buyer, and remit it to the appropriate tax authority.

Use Tax:

• Self-assessed by the buyer: If a business purchases goods or services and no sales tax is charged, it must self-assess use tax and remit it directly to the tax authority.
• Buyer’s responsibility: The business purchasing the goods is liable for remitting use tax if sales tax was not collected by the seller.

Examples:

• Sales Tax: A business buys office supplies from a local store. The seller collects sales tax, and the buyer has no further tax liability.
• Use Tax: A business buys equipment online from an out-of-state vendor that does not charge sales tax. The business is responsible for reporting and paying use tax on the purchase.

Common Misconceptions:

1. “Sales tax and use tax are the same.” Many businesses mistakenly believe that if sales tax is not charged, no tax is due. In reality, use tax often applies when sales tax is not collected.
2. “Out-of-state purchases aren’t taxable.” Use tax applies to goods purchased from out-of-state vendors if sales tax was not collected.
3. “Minimal purchases are exempt.” Even small, one-time purchases from out-of-state vendors can be subject to use tax.

3. Common Scenarios Where Businesses Are Liable for Use Tax

Businesses often encounter use tax liabilities in various scenarios, especially as e-commerce and interstate transactions become more common. Here are some examples of when use tax applies:

1. Online Purchases from Out-of-State Vendors

• If a business purchases goods from an online retailer or vendor located outside its home state and no sales tax is charged, the business must report and remit use tax. This is particularly common with online or catalog-based vendors.

2. Using Inventory for Personal or Business Purposes

• If a business buys inventory tax-free (intended for resale) and later uses that inventory for internal purposes, such as marketing or business operations, it may owe use tax on those items. For example, using promotional materials or sample products may trigger use tax liability.

3. Purchases of Equipment and Supplies

• Equipment purchased from out-of-state vendors without sales tax is subject to use tax in the state where the equipment is used. For example, buying machinery from a vendor in another state with no sales tax collection means the buyer must remit use tax in their home state.

4. Construction and Manufacturing Industries

• In industries like construction or manufacturing, businesses often purchase raw materials or equipment from vendors that don’t collect sales tax. These items are typically subject to use tax if used within the state.

4. Common Use Tax Mistakes

Errors in handling use tax can lead to significant financial and legal consequences for businesses. Here are some of the most common mistakes companies make regarding use tax:

1. Failing to Recognize Taxable Transactions

• One of the biggest mistakes businesses make is failing to recognize when a transaction is taxable. For example, many companies overlook out-of-state purchases that didn’t include sales tax, assuming that no tax is due.

2. Incorrectly Calculating Use Tax

• Businesses often miscalculate the amount of use tax due by applying the wrong tax rate or basing the tax on an incorrect purchase value. Local use tax rates may vary, and failure to apply the correct rate can lead to underpayment.

3. Missing Use Tax Filing Deadlines

• Businesses frequently miss deadlines for filing use tax returns, which can lead to penalties and interest. It’s essential to stay on top of filing requirements to avoid falling behind.

At Miles Consulting Group, part of what we do is ensuring you stay complaint in all matters of use tax obligations. Let us help you.

5. Impact of Use Tax Mistakes

Mistakes in use tax compliance can have severe financial and legal repercussions, making it crucial for businesses to understand the potential impact of these errors.

1. Financial Penalties and Interest Charges

• Businesses that fail to properly assess and remit use tax are subject to significant penalties. In addition to the tax return penalty, many states impose interest on overdue or underpaid use tax liabilities. These penalties can compound over time, creating a substantial financial burden.

2. Legal Implications and Audits

• Errors in use tax reporting can trigger state audits, which may reveal further discrepancies in tax reporting.

6. Mistakes on Tax Returns: Identification and Prevention

Identifying and preventing use tax mistakes before filing returns is essential to avoid penalties and interest. Here are some strategies businesses can use to spot errors and ensure accurate filing.

1. How to Spot Errors Before Filing

• Before filing, businesses should review all purchases made during the tax period to ensure that any goods or services not subject to sales tax are correctly reported under use tax. Check purchase orders, receipts, and invoices to verify whether sales tax was collected.

2. Double-Checking Documentation and Calculations

• Ensure that all documentation for taxable purchases is in order and that the correct use tax rate is applied. Use tax rates can vary by locality, so it’s important to apply the correct rate based on the destination of the goods or services.

7. How to Fix Tax Mistakes

If a business identifies an error in its use tax reporting after filing, it’s important to take immediate action to correct the mistake and avoid further penalties.

1. Steps to Correct Errors After Filing

• Start by reviewing the original tax return and identifying where the error occurred. If additional use tax is due, calculate the correct amount and prepare to remit the payment.

2. Amending Tax Returns

• Most states allow businesses to file amended returns to correct errors. This process typically involves submitting a corrected tax return and documentation supporting the changes. Amending returns can help avoid further penalties by demonstrating good faith efforts to correct the mistake.

3. Seeking Professional Help

• In cases where errors are complex or involve significant financial risk, businesses should seek professional help from tax consultants. A tax advisor can help navigate the amendment process and ensure compliance. At Miles Consulting Group, we know how sticky things can get – let us help you.

8. Consequences of Late Tax Filing

Late filing of use tax returns can lead to significant financial and reputational damage for businesses. Here's what businesses need to be aware of when it comes to late filing penalties:

1. Financial Penalties for Late Filing

• States impose late filing penalties on businesses that fail to submit use tax returns by the deadline. These penalties are often calculated as a percentage of the tax owed and can increase over time if the tax remains unpaid.

2. Interest on Unpaid Taxes

• In addition to penalties, states charge interest on unpaid use tax. The interest rates vary by state and are typically compounded monthly, increasing the total liability over time.

3. Increased Risk of Audit

• Late filing or non-filing of use tax returns raises red flags for state tax authorities, increasing the likelihood of an audit. Audits can uncover additional errors and lead to further assessments, fines, and legal complications. If you’ve received a letter of audit from a government entity, don’t panic - read our series on sales and use tax audits:

The Sales Tax Audit Series

The Mini Sales and Use Tax Audit

The Pre-Audit

Navigating the complexities of use tax can be challenging, but with careful attention to compliance, businesses can avoid costly mistakes. By understanding when use tax applies, accurately calculating the tax owed, and maintaining proper documentation, businesses can ensure that they meet their tax obligations while minimizing the risk of penalties and audits. For businesses unsure about their use tax responsibilities or those facing complex transactions, consulting with a tax professional is often the best way to ensure compliance and protect the bottom line. Come to Miles Consulting. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

 

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by Monika Miles

Success Stories from Sales Tax Consulting

The Transformative Power of Sales Tax Consulting: Real-Life Success Stories

Sales tax compliance isn’t what it used to be—thanks to the Wayfair ruling and a maze of state-specific tax laws, it’s now a bit like playing a game where the rules keep changing. For businesses of all sizes, this can feel overwhelming. That’s where a seasoned sales tax consultant can be a game-changer.

Miles Consulting is ready to help you navigate the maze, as we’ve done for so many of our clients. But the proof is in the pudding, as they say. So, here are some real-world examples of how we’ve helped our wonderful clients master their sales tax obligations.

Here’s what you can read about:

1. Case Study 1: Small Retail Business Manages a Sales Tax Audit

• Background: Challenges faced by a security products manufacturer during a California state audit.
• How We Helped: Use of a Managed Audit Program (MAP) to mitigate penalties and interest.
• Results: Avoidance of penalties and significant cost savings, leading to full compliance.

2. Case Study 2: Mid-Sized Manufacturing Company Successfully Navigates Sales Tax Challenges

• Background: Risks identified during a due diligence process for a company planning to sell its business.
• How We Helped Implementation of best practices to address, retroactive liabilities, reduce exposure and come into compliance.
• Results: Reduction of audit-related stress, mitigation of financial impact, and successful sale.

3. Case Study 3: E-Commerce Business Tackles Multi-State Sales Tax Compliance

• Background: A SaaS company discovers unreported sales tax liabilities in multiple states.
• How We Helped : Multi-state compliance strategy including VDAs and tax software implementation.
• Results: Remediation of sales tax exposure, penalty avoidance, and streamlined compliance processes.

4. Common Themes Across Success Stories

• Cost Savings: Significant financial improvements through expert intervention.
• Penalty Avoidance: Effective strategies to navigate complex tax landscapes and avoid penalties.
• Improved Compliance Processes: Sustainable compliance achieved through expert advice and technology.

Want to know how we can help you? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Case Study 1: Small Retail Business Overcomes Sales Tax Audit

Background

Our client, a well-established manufacturer and distributor of home security products based in the Midwest found themselves under scrutiny by the state of California. Despite their long-standing presence in the market, recent growth had exposed them to new sales tax obligations that they were unprepared to meet. The changes in economic nexus* brought about by the 2018 Wayfair ruling had left them non-compliant in several states, leading to a challenging audit by the California Department of Tax and Fee Administration (CDTFA).

*For a comprehensive guide to sales tax nexus reviews, read this article we wrote.

How We Helped

Faced with the daunting prospect of a state audit outside their home state, the company turned to our team of sales tax experts for help. Leveraging our deep knowledge of both California specific laws and administrative remedies, we guided the company through the audit process. A key strategy was enrolling the company in a Managed Audit Program (MAP), a special initiative that allowed for a reduction in penalties and even interest. Not every business qualifies for a MAP, but our technical expertise enabled us to manage the audit so effectively that the CDTFA agreed to the reduced interest, significantly lowering the company's financial burden.

Results

The outcome was a huge success. Not only did the company avoid hefty penalties, but they also achieved substantial cost savings through the reduction of interest. Today, they are fully compliant in California and have implemented new processes to ensure they remain compliant in other states as well.

2. Case Study 2: Mid-Sized Manufacturing Company Successfully Navigates Sales Tax Challenges

Background

Donna, the owner of a family-owned manufacturing company, found herself facing a daunting challenge as she prepared to sell her business. While her company shipped products across the United States, she was unaware that this expansion had created significant sales tax obligations in multiple states. As Donna worked with the potential buyers during  the due diligence process for the sale, it became evident that the company had sales tax exposure that could potentially derail the transaction or lead to substantial financial liabilities.

"I found out that I wasn’t aware of or compliant with the State Sales Tax laws while trying to sell my company. After consulting with Monika and her team, I understood that I had reached nexus in 27 states. I knew this was not something I was prepared to navigate alone and needed to get in compliance, preparing and filing VDAs and Back Returns, so that I could move forward in selling my company."

How We Helped

Understanding the urgency of the situation, our team at Miles Consulting Group stepped in to manage the audit process and guide the company through the complex landscape of multi-state sales tax compliance. We implemented a comprehensive strategy that included the preparation and filing of Voluntary Disclosure Agreements (VDAs) and retroactive filings across the 27 states where her company had nexus. This proactive approach not only addressed the immediate audit concerns but also laid the groundwork for improved compliance going forward.

"Having 27 states to tackle, the team was incredibly organized and communicated with me each step along the way. They made my very large problem seem manageable and assured me that we would tackle it all," said Donna.

In addition to managing the VDAs and back returns, we also assisted the company with its  monthly returns and filings, ensuring that all obligations were met until the sale of her company was finalized.

Results

Donna and her company  were able to successfully navigate the sales tax challenges that had threatened the sale of her business. "Now that Miles Consulting has helped me resolve my sales tax issues, I was able to close on the sale of my company," Donna remarked. The audit-related stress was significantly reduced, and the financial impact was mitigated through accurate tax filings. She  also noted, "Without any hesitation, I highly recommend hiring the team at Miles Consulting Group. Navigating the process of filing VDAs, back returns, and getting compliant with our sales tax filings was just not something I had time to take on while trying to simultaneously run the day-to-day and sell my business."

This case study highlights not only the expertise of our team but also the personal connection we build with our clients. "The attention and effort they put into helping me was above and beyond. Not only were they true professionals with every interaction, but I felt like I was working alongside friends. They truly cared about helping me get my issues resolved."

3. Case Study 3: E-Commerce Business Tackles Multi-State Sales Tax Compliance

Background

Our third case study involves a SaaS company. The company serves a diverse customer base that includes both large enterprises and smaller businesses, even individuals, who may purchase their software online with a credit card. While their home state does not tax SaaS revenue streams, they were unaware that their operations in other states had created significant sales tax liabilities. It wasn’t until their financial auditors conducted an annual review that the issue of unreported sales tax liabilities came to light.

How We Helped

To address this complex challenge, we employed a multi-state compliance strategy that involved engaging in a nexus and taxability review to identify the company’s sales tax exposure across the United States. Our approach to mitigate their liabilities included both Voluntary Disclosure Agreements (VDAs) and the registration and retroactive filing of sales tax returns in over 15 states. This proactive strategy not only brought the company into compliance but also helped them avoid over $100,000 of  penalties.

We also worked closely with the company’s team to implement sales tax software, ensuring that their revenue streams were properly coded and that they could manage their monthly and quarterly filings independently. Despite this newfound autonomy, we continue to consult with the company regularly to address any emerging issues.

The client recently remarked “It’s great having the Miles team as a partner to be able to rely on their sales tax expertise. They give us answers and documentation support in a way that we’re able to digest it, and it enables us to assess risk and get comfortable around our sales tax compliance.”

Results

The benefits of this intervention were substantial. The company was able to remediate all prior exposure using VDAs, which reduced lookback periods and negated penalties. They now enjoy enhanced compliance across multiple states and have streamlined their tax processes, leading to a more efficient and effective approach to sales tax management.

4. Common Themes Across Success Stories

Cost Savings

One of the most consistent outcomes across these case studies is the significant cost savings achieved through expert intervention. Whether through penalty reductions, interest savings, or the  reduction of taxes due to proper application of state tax laws (which, of course, vary by state) , these businesses were able to improve their financial standing and reinvest those savings back into their operations.

Penalty Avoidance

Another key theme is the effective strategies employed to avoid penalties. By engaging early with the right expertise, these companies were able to navigate complex tax landscapes, ensuring that they remained compliant and avoided the costly repercussions of non-compliance. Penalties can often be as high as 20% of the tax liability. Being able to reduce or eliminate those by working with a professional such as Miles Consulting can be very significant, and generally more than pays for the cost of our assistance.

Improved Compliance Processes

Finally, all three case studies demonstrate the importance of sustainable compliance processes. Through a combination of expert advice, technology implementation, and ongoing support, these businesses are now better equipped to manage their sales tax obligations, reducing the risk of future issues.

The value of hiring the right sales tax consultant  is undeniable, as evidenced by these real-life success stories. Whether you’re a mid-sized company, or a large enterprise, the right expertise can make all the difference in navigating the complexities of sales tax compliance. We’re so proud of the relationships that we forge as we help our clients navigate these waters!

At Miles Consulting, we’re here to help you achieve compliance and peace of mind. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

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by Monika Miles