Do you know what use tax is? If not, how will you know how or when you need to pay it? Most business owners, especially new business owners, think paying use tax is not a big deal, but believe me, it is.
Failure to comply with any one of a multitude of sales and use tax laws can have devastating consequences for a business. A business that is out of compliance with tax laws may be subject to expensive assessments that can literally cripple the business’s economic viability.
Let’s begin with the basics:
Are you aware that sales and use tax laws vary from state to state and while you may be compliant with tax laws in one state, you may not be in another. With sales and use being the second largest generator of revenue for states, behind income tax, a business needs to ensure it is compliant in every state it does business in or face expensive assessments, penalties and interest.
With 45 states and the District of Columbia currently imposing sales and use tax, that’s an amazing number of possible differences in taxation you need to pay attention to! There are only five states that do not impose a sales tax and they are: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, even though these states may not impose sales tax at the state level, cities, counties and special districts may have the authority to impose the taxes.
What is Sales Tax?
At this point you may think that sales tax is just a tax you collect at the register for items sold to you customers, but for most business it’s much more than that. Business collecting sales tax must have a way to document and track every transaction occurring in their daily operations. In addition, state laws require the tax to be shown separately on a customer’s receipt so that is easily identified by the customer and state auditors. In some special instances a state may allow the tax included in the price of goods and not broken out, but this is very unusual. Conventionally, sales tax is levied on the sale price of all tangible personal property being sold to the end-user.
What is use tax?
Use tax is a type of excise tax levied by the state and collected by the state’s Department of Revenue. The tax is generally assessed or accrued on an untaxed purchase of tangible personal property by a business for use, storage or consumption in the state. What the does that mean? It means that the business may owe use tax if it did not pay sales tax at the time you purchase. This occurs most often when a business orders items from out of state and the out of state vendor does not charge sales tax. Therefore, the business owes use tax on the purchase price of the items it will use within the state where delivery occurred.
As you can see from the basic information listed above, starting a business may be fun and exciting, but knowing everything you need to know about administering sales and use tax is crucial. The information provided is just the tip of the iceberg when it comes to sales and use tax. For now, start asking yourself: what does my state require when it comes to reporting the taxes? How many states do I ship goods to? Do I sell to someone who re-sells my goods? Am I ready for an audit? What do I do if my business has multiple locations?