Use Tax

Q: WHAT IS THE DIFFERENCE BETWEEN SALES AND USE TAX?

A: Technically, all sales that cross a state line are a use tax. When states first began to impose sales taxes back in the 1930s, it was commonly believed that states could not directly tax interstate commerce. So, a sales tax could only be imposed if the transaction happened 100% inside the state. To prevent out-of-state companies from having an unfair advantage, the concept of a use tax was introduced. Use tax is a tax on the storage, use, or consumption of a product or service in the state. It is not a tax on the transaction, but on the taxpayers of the state, so it’s not a direct tax on interstate commerce. If the seller had nexus, they were required to collect the use tax. If the seller did not have nexus, then the purchaser was responsible for remitting the tax directly to the state. In 1977, the U.S. Supreme Court said that states could tax interstate commerce directly, and some states did away with a seller’s use tax and only have a consumer's use tax at this point. Anywhere you have a brick-and-mortar, you generally want to register for the sales tax. If you do not have a brick-and-mortar, then you would generally sign up for use tax if the state still makes a distinction.

Q: HOW DO YOU ADVISE COMPANIES THAT ARE CONCERNED WITH PAYING PROPER SALES TAX ON PURCHASES FOR THEIR BUSINESS? IF SUPPLIERS DO NOT HAVE ROBUST SALES TAX COMPLIANCE, HOW CAN COMPANIES MANAGE THEIR EXPOSURE FOR SALES/USE TAX PAID?

A: Having a strong use tax accrual process in place can help identify invoices where tax is being overpaid, tax is being underpaid, and where tax has not been collected at all. Some companies examine every invoice, but if you make many small purchases, this can be cost-prohibitive. In cases like this, the smaller invoices are reviewed on a sample basis and invoices over a chosen dollar amount are reviewed individually. Or in some cases, you can exclude purchasers from companies who continuously get it right, and focus on the companies that don’t charge tax or continuously get it wrong.