Many companies and individuals are not aware of the requirement to pay use tax on purchases that were made without paying applicable sales taxes. Sales tax is levied upon the purchase at the point of delivery. This means that many internet sales do not include sales tax if they are shipped out of state, leaving the purchaser the pay the applicable sales tax (called use tax), to their home state. This is likely about to change due to the recent Supreme Court decision (South Dakota vs. Wayfair ), however, in the meantime, businesses and individuals are still required to required to track and pay use tax until both the states and on-line retailers catch up.
For the remainder of this article I will focus primarily on the business requirement to track use tax due and how to use Quickbooks to facilitate that. Generally, use tax is remitted by businesses to the agency who collects and administers sales tax. This may be on a monthly, quarterly, or annual basis depending on the agency requirements.
If you do not pay sales tax at the time of purchase, you need to accrue the use tax in the books and pay when filing the use tax return. The best way is to record the tax due at the time of the purchase. First, create a new general ledger account called “Use Tax Payable”, this is an “other current liability”. Then when posting the purchase, calculate the use tax in the overall cost of the purchase and then post the use tax due on a separate line.
Assume you purchase of a $10,000 piece of equipment, for which sales tax was not paid at the time of purchase. The current sales tax rate in the home city is 8% so this means $800 in use tax is due to the home state.
The treatment in Quickbooks is illustrated below.
When it’s time to pay the tax and complete the use tax return you post the payment to the liability account.
If you pay sales tax at the time of purchase, for example, you drive out of state to purchase equipment and you do pay sales tax to the retailer, you may not be required to pay use tax if you paid more or equal sales tax to your home rate. This is unless of course, you pay less out sales tax of state than where the object ultimately is placed in use. For example, if you drive from Los Angeles, CA (Sales tax rate 9.5%) to Las Vegas, NV (8.25%) and you purchase a piece of equipment paying 8.25% sales tax, then bring it back to Los Angeles to put it in use, you owe use tax on the difference between the sales tax rates. You would enter this in the same way as above, calculating the difference between the two rates.
Use tax may be incurred in the following transactions:
- Amazon and other on-line purchases where sales tax is not paid.
- Phone orders of equipment or supplies from out of state.
- Ordering from a state that does not charge sales tax. (Alaska, Delaware, Montana, New Hampshire, Oregon).
- Purchasing products for resale, then using them for business use. (i.e an on-line office supply company who takes stock for internal use).
What is taxable? Generally it’s tangible personal property. However, other items can be taxable as well, such as software, equipment rentals, some food, off highway vehicles, boats, vehicles, aircraft, and fabrication labor. In some states, (like Texas) certain services are taxable. Non-profits can be exempt from sales and use tax in certain states (like Nevada, on approval only). Freight and packaging materials also may be exempt. Each state has varying requirements depending on the type of company and product that is sold. Whatever product or service is subject to sales tax is usually subject to use tax.
However, some of these transactions, might have sales tax included; some Amazon purchases do have sales tax included, some do not. Phone orders from an out of state company with a physical presence in your state may charge sales tax. However, it is generally up to the purchaser to determine whether or not sales tax has been paid and if not, then to pay the use tax. This can usually be done by reviewing receipts or invoices.
Currently, a large number of small businesses don’t often know about “use tax” until they are audited or they don’t have a good process to track use tax due. The rules can be complex for the purchaser, particularly when using out of state or internet retailers. It is anticipated that internet retailers will soon face a challenge in complying with changes to state sales tax laws due to the Wayfair decision. This may relieve some (but not all) of the burden on businesses to track and pay use tax. As always, it’s important to get expert tax advice and be aware of the use tax requirements in your state.