[This is a major revision and replacement of an article from November of 2007. Nothing wrong with the original, just simplifying.]According to one of the Golden Rules, if the vendor didn’t charge you tax, then you owe use tax (subject to a lot of exceptions ).
One of the important jobs of Accounts Payable is to catch the invoices that don’t have taxes charged and to accrue the use taxes. This is the outline of a procedure that you’ll need to customize to your own organization, but hopefully you'll get some ideas. You don't have to do it this way, but you should be able to document, on the invoice, why the invoice WASN'T taxable, or if you PAID the tax.
The image at the top of this article is a simple rubber stamp design. If you stamp each non-taxable invoice with something like this, you clearly demonstrate to the auditor that you have been carefully following an important procedure.
Here's the procedure:
1. Did the vendor charge you tax? Then you have no need of this rubber stamp - pay the tax (assuming the vendor charged the correct tax).
2. If the invoice isn’t taxable (based on your cheatsheet), you will now want to indicate why it isn’t taxable and therefore why you didn't accrue. A few sample reasons are:
RS - purchase for resale
DM - purchased for direct use in manufacturing process
RP - real property, not tangible personal property
S – service, not taxable
EX1 – exempt for reason number 1 from your cheat sheet.
Write the reason in the space available on the rubber stamp. Now you have something clear, on the face of the invoice, explaining why you don't need to pay tax on this purchase. This makes it easier for the auditor to quickly review and move on.
3. If taxes weren't charged and the purchase was taxable, then you must accrue the use tax. Calculate the tax and post it as part of your invoice distribution (debiting UT expense and crediting the UT liability account). I assume you show your accounting distribution on the face of the invoice or in an attached document. Again, you make the auditor's job easier (and faster) if they can see, just by looking at the invoice, that you've accrued the tax. And they can follow it through your accounting system.
Use some method of showing, on the invoice, why it wasn't taxable. And if it was taxable, how you accrued the tax if the vendor didn't charge tax. You'll get less questions from the auditor, they work faster, and get out of your hair quickly. It's a good thing.
The Sales Tax Guy
http://salestaxguy.blogspot.com
See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.
Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.
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