Tuesday, July 28, 2009

The Four Loopholes (Loophole Number 2)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

The Vendor Makes a Mistake

The vendor (Steve) sells Mike a machine and, for whatever reason, fails to charge Mike sales tax. What will happen to Mike when he gets audited and the eagle-eyed auditor notices that there is no tax on the invoice? Hmm?

[I'm trying to recreate a seminar experience here, folks. So I need someone to blurt out the answer. ]


Yes, absolutely correct. Gold star for Mary! The auditor will make Mike (the buyer) pay the use tax. In most states (but not all) the buyer, for all intents and purposes, has the burden of the sales tax imposed on him. If it is not, the buyer will have to pay the use tax. But the buyer's burden is usually relieved by simply having a receipt from the seller showing that sales tax was charged.

Since Steve (the seller) didn't charge Mike tax and therefore Mike has no tax receipt, Mike will get burned at audit time. Or, if Mike has a good AP specialist, he (or she) may have spotted Steve's mistake and accrued the tax in the meantime. Either way, the state gets their money. They either get it from Steve (the vendor) when he does his job correctly. Or they get it from Mike (the buyer) later.

The loophole was that if the seller didn't charge tax, the state couldn't get the money from anyone but the seller. But when they invented use tax, they had a mechanism to get the tax from the buyer as well. Nifty.

Here's a question though. Did Steve screw up? What if he absorbed the tax? Or what if he knows the item isn't taxable? If the AP specialist, or the auditor, simply reacts to the invoice not having tax, then Mike might over pay his use tax. Heavens!

That's another article.

Sales Tax Guy

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Picture note: I wanted a picture the shows a mistake clearly being made by someone.

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