Tracking Use Tax in Quickbooks

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.

For example:

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.

snip for use tax

 

When it’s time to pay the tax and complete the use tax return you post the payment to the liability account.

use tax payment snip.PNG

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.

 

 

Best Practices in 1099 Reporting

The 2016 1099 deadline is just slightly over a week away. This year, one major change affects 1099 issuers in the US. The due date for sending Form 1096 to the IRS has been moved up from February 28th to January 31. For many, this adds an additional time pressure to ensure all of the information is correct and ready to submit on time.

My clients frequently ask for guidance on best practices in keeping track of the requirements. One of the biggest headaches this time of year is trying to get W-9 information from vendors who slipped through the cracks.

The best practice, of course, is to request W-9 information before a check is issued. While this isn’t always the case, there are some other “hacks” to make this process go more smoothly.

1. You don’t necessarily need a formal W-9 if another form contains substantially the same information.You can develop your own form for purposes of collecting the same information if you include the certification requirements.   However, if you’ve received a “B” Notice for the recipient in the past, follow the instructions on that notice.

2. In Quickbooks, you can save a lot time by including the word INC or CORP in the vendor name if the company is a Corporation. Unless an exception applies (like Legal fees), corporations are generally not subject to 1099 reporting. Refer to the 1099 instructions for more information. LLC’s can be a source of confusion as an LLC can be taxed in several different ways. How the LLC is taxed determines whether or not a 1099 is issued. Partnerships, sole proprietors and individuals are not exempt from reporting.

3. If a payee won’t provide a Tax ID number, I usually send a final letter highlighting the “Refusal to provide TIN” section of the W-9 instructions. Failure to provide a TIN can trigger a $50 IRS penalty. If they still won’t comply, I file the 1099 with the words “REFUSED” in the TIN field. Keep proof of your diligence in trying to comply with the requirements.

4. If you are still regularly paying a vendor who will not provide a tax ID number, you may have to resort to back-up withholding. Refer to the link to the instructions below.

5. When requesting W-9 forms , provide the entire form (all 4 pages) there is a wealth of information in the instructions. Many B notices can be avoided simply by adhering to these instructions.

6. Use the notes field in the vendor screen in Quickbooks to keep track of 1099 issues. You can also scan and attach the W-9 for future reference.

7. Do a 1099 checkup quarterly to see which information is missing (which of course should be none if you get it before payment is issued). It can be difficult to track down vendors months after they are paid to obtain their information. Don’t wait until December or January to start tracking down missed information.

8. Save your blank forms for a few months in case you have to issue a corrected or missed form. I avoid using the IRS forms as they’ve always jammed my printers.

9. Last minute filing? There are many electronic filing providers who charge roughly $3-5 per form and take care of the 1096 filing and recipient copies as well. I’ve used Yearli and Intuit on line payroll in the past which both work well.

10. If your company handles a large number of vendors, develop a vendor on-boarding process to reduce 1099 headaches. I’ve seen a number of Quickbooks files that don’t utilize the vendor contact information fields which can be a good source of information.

11. Many times vendors are duplicated in Quickbooks. You’ll need to fix that before issuing 1099’s. The easiest way to correct duplicates is by merging the vendor names. Go to the Quickbooks vendor file, copy the vendor name of the vendor you want to keep, then open the vendor you want to merge. Rename that vendor exactly the same name, punctuation and all. A box will pop up asking if you want to merge (this cannot be undone).

12. When in doubt, read the instructions:

Form W-9

IRS 1099 Instructions