Golden Rule: Use

Half of what this blog is about is called "use tax." What do we mean by "use?"

The meaning varies from state to state. This is most inclusive one that I've found. So it may be overkill depending on the state involved. Remember, there's an exception to everything!

"Use," in a use tax sense, means that the item is under the control of the "user."

The obvious example is the laptop on which I'm writing this masterpiece. I'm using the computer, therefore, I'd owe use tax (assuming I haven't already paid the tax).

The best example is when I store something on a shelf in my office, without even opening the box. I've used it as far as the state is concerned. I controlled it, even if I didn't get any value out of it. Therefore, I'd owe use tax (assuming I haven't already paid the tax).

Let's say that I buy a GPS unit from Amazon.com to give to my old buddy George, who works with me. I happen to be out of the office on the day the package arrives. I know George is going on vacation, and that he could really use the GPS unit (he gets lost a lot). So I call him and tell him that the package is on my desk and to please take it (I ordered it gift wrapped - I'm such a nice guy). Amazon didn't charge me tax because they don't have nexus in my state. So the responsibility falls to me to pay the use tax. While I never even touched the box, let alone the GPS unit itself, I had control over it. And, in addition, I used it by giving it to George.

Note that you don't have to own it to owe use tax. If you rent some tangible personal property and the vendor didn't charge you tax, then (depending on the state), you'll owe use tax on it. You don't own it, but you have control over it.

There are situations where contractors, who use building materials to construct a building, will have to pay use tax on the materials, even if they were purchased tax-free by the tax-exempt organization. That's because, while the organization may be exempt, the contractor isn't. And he used those materials.

This doesn't have to be hands on either. It can be by remote control.

Bottom line? You use by having control. That's all it takes.



Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Quick Tip: Get Rid of Your auditors

You should be nice to auditors, but not too nice. Keep them away from the rest of your staff would be a good first step.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Quick Tip: Use Local Experts

If you've got problems, you need to use a sales and use tax expert who is up to his or her elbows in local issues. More here. And we have many related articles here.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click on the picture, then click on the "all sizes" button above the picture.

Essentials Actions

Here are a few essential things that every organization and business must make sure they have under control.

Pay sales and use taxes that you collect from your customers. This is probably the worst offense possible, and can mean the loss of your business and possibly even orange jumpsuits. Don't screw this up.

Get exemption certificates from your customers and watch expiration dates.

Document things as if the audit will be two or three years from now. Because that is when the audit will happen. You're not going to remember what happened yesterday.

Be sure about your exposure to other states' taxes. Not just your own.

Make sure your services aren't taxable. In other states, too.

Make sure you get good advice from knowledgeable sources. Because you're probably not.

Pay your use taxes.

Don't overpay your taxes.

Check to make sure your business is taking advantage of every possible sales tax exemption.

Be nice to the auditor.

Watch your timings!

These were the things you really must do. And then there are a whole bunch of things you should be doing.



Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click here, then click on the "all sizes" button above the picture.

Link: Sales tax holidays are gimmicks

Tax Foundation slams sales tax holidays as gimmicks.

Retailers can get in trouble when absorbing the tax

This is the fourth and final article in my current "absorption" series.

First of all, keep in mind that absorption, in most states, is illegal. In fact, it’s often defined as a misdemeanor. However, I’ve never heard of anyone going to jail on this. Often the attitude is, "Hey, the state got their money. What's the big deal?" As we've seen previously, there are problems. But the problem for today is that the seller isn’t actually remitting enough taxes to the state on the sale.

Let’s assume the sales tax rate is 7%. Joe sells a machine to Tony for $100,000. He absorbed the tax because Tony keeps whining about how Frank from Montana doesn’t charge him tax so maybe he’ll buy from Frank instead.

Joe’s not an idiot, so he reports sales to the state of $93,458 and $6,542 in taxes (it comes out to the $100,000 that he actually got from Tony). In other words, Joe absorbed the sales tax into the sale.

But what was the real gross sale to Tony? The invoice (which doesn’t show tax) shows a sale of $100,000. Joe’s records, including the journal entry to back out the tax, show a gross sale of $100,000 and an expense of $6,542.

One of the things auditors do is compare the sales on your books, with your invoices, with the sales you report on your sales and use tax return. The gross sale was $100,000. Which means the tax that should have been reported was $7,000 instead of $6,542. Joe under-reported his sales taxes by $458.

Joe can solve the problem by charging the taxes separately. Then it’s clear what the gross sales were, assuming you are doing the proper accounting on the back end.

Of course, then Tony will buy from Frank. That’s OK, Joe didn’t want his business anyway.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Sales and Use Tax Links

In Nebraska, you'll pay SUT on the cash for clunkers program. Here and here
This brings up the question of "basis" and how rebates are handled.

You'll pay more in sales taxes at Chicago O'Hare airport than anywhere else! Here and here
Yay for the home team!