Last month we talked (blogged) about new sales tax legislation that will likely affect most companies doing business in multiple states, whether online or otherwise. This month let's review another important yet often overlooked facet of sales tax legislation: Consumer use tax.
Very few of us truly understand use tax, and even fewer actually comply. So what exactly is consumer use tax? In simple terms, it is a tax that is collected and remitted by the buyer rather than the seller.
What's the Difference?
A number of purchase events can trigger use tax. One area where we often see use tax incurred is when buyers purchase taxable items for internal use from out of state vendors (often on the internet). If they don’t pay sales tax, and the sale should not be considered tax-exempt, the buyer is responsible for filing and remitting the use tax.
So technically, those “tax free” purchases you make online? Not really “tax free” at all!
Very few consumers actually file personal use tax returns, and it would take armies of auditors to go after all the individuals who incur use tax. But that doesn’t mean it isn’t a prime area of audit risk for businesses. Nearly every company has some amount of customer use tax obligation. And nearly every sales tax audit will include a review of purchase transactions (in addition to sales transactions) to uncover that obligation and verify that it’s been met. Failure to accurately self-assess can result in fines, penalties, and interest.
Some states have recently passed laws to try to collect use tax revenue. For example, in Kentucky, HB 440 requires certain out-of-state retailers to provide their customers in that state with a use tax notification.
Laws vary from state to state, and there are a variety of other situations that create use tax liability. Each of these situations, if not handled properly, can expose your organization to audit risk. To learn how to reduce your exposure, download the whitepaper: The Challenges of Use Tax Compliance.
For more on current sales tax legislation in general, including an update on what you can expect to see change this year with respect to “Amazon Laws” and the Marketplace Fairness Act of 2013, register to attend a webinar on June 13: The Sales Tax Landscape Is Shifting. Be Ready.
by Avalara