When you think complexities in taxes, which areas come to mind? Corporate taxes—ranging from AMT to payroll—are probably atop the list. For ecommerce companies, the answer is sales tax in the wake of Wayfair. But how about use tax? Often overlooked, this usually goes on the back burner for companies, exposing compliance professionals to unforeseen risk.
After all, the IRS has nearly unlimited resources, state governments are looking for any revenue that they can generate, and bad reporting can put you in the crosshairs of both. This is why controllers, accountants, and other finance professionals need to understand the risks of misreporting and the opportunities for improvement.
Luckily, a recent guide from Controllers Council sponsor Avalara looked to help finance professionals make sense of use tax compliance. Titled Consumer Use Tax: A Bane for Businesses, the guide explores the nuances and challenges of calculating and complying with use tax regulations.
Sales Tax is the Standard—Use Tax is the Wingman
As discussed in the guide, sales tax and consumer use tax have a lot in common. Both are transaction taxes on goods and services. All 45 states that have sales tax also have use tax. And rates for sales tax tend to be the same for use tax in most (but not all) states.
Sales tax is the predominant standard, with consumer use tax being the wingman, so to speak. If the seller doesn’t charge sales tax on a taxable sale, then the buyer is obligated to pay use tax. However, putting this responsibility on the buyer can be risky, as it’s estimated that fewer than 2% of taxpayers report use tax on their returns.
Knowing this, it’s easy to overlook consumer use tax, and if this is the case, organizations could be exposed to risk without even knowing it. Systems are often not geared to tax, and even the most vigilant companies struggle to get it right—leading to potential errors and in turn, audits.
When Might You Find Yourself Owing Consumer Use Tax?
Any time a business grows or changes, you might find yourself exposed to new tax liability. Often, if it affects sales tax, it impacts use tax, and this is where the differences between these two types of taxation come into play.
According to Avalara, multiple things can trigger use tax, including but not limited to applying the wrong tax to a vendor invoice, internally using or transferring inventory, moving assets between office locations, procuring new equipment, using a service (like software) across multiple locations that was paid for based on only one location, and donating merchandise to a charity or promotional giveaway.
They go on to highlight the following examples:
- Sarah is a controller for a software business based in San Francisco. The company is opening a new office in Seattle. She asks the purchasing department to order new laptops and ship them to the San Francisco headquarters so they can be preloaded with software programs for the new employees in Seattle.
- Frank signs off on a specialized piece of equipment for the Ohio manufacturing plant for his company. He adds cleaning supplies needed for maintenance, safety equipment for the operators, and a storage unit for the parts to the purchase order, and then attaches an exemption certificate.
- Rachel is in charge of her company’s sponsorship at a regional charity golf tournament in Augusta, Georgia. Since they sell golf apparel and accessories, she brings several products for promotional giveaways and auction items.
- Lucas heads up sales for a growing Durham-based business. He hired 10 remote sales associates in the Chicago area and asked IT to set them up with access to Salesforce, Microsoft Office, Zoom, and other essential software applications. The Durham HQ office will be billed for the costs.
- Stacy handles parts procurement for a Texas manufacturer. Vendors often incorrectly apply sales tax to production invoices. Stacy applies for a Texas direct pay permit so her vendors no longer charge the company sales tax on those transactions
From manufacturing to retail, healthcare, hospitality, and more, a variety of organizations in a wide range of industries could find themselves in hot water if they are relying on manual processes to track and pay.
How to Overcome the Hassles of Consumer Use Tax
If you’re looking to understand what goes into tracking, calculating and reporting consumer use tax, Avalara recently released a free guide on the best ways to improve. Exploring the ways that Avalara Consumer Use helps businesses, the guide can help you understand the pain points and paths to improvement. Download this free guide here.