Are You a Target for a Use Tax Audit?

Keeping track of and remitting use tax: it’s one of those items that can get pushed far down the list of priorities and disregarded. Anyone who has made online purchases may have experienced the feeling. As you’re finalizing your purchase on a website, you notice that no sales tax has been charged. That’s a great thing, right? Not so much.

What Exactly is Use Tax?

Use Tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is a complimentary tax to the sales tax and does not apply if the sales tax was charged. So if sales tax is not charged on a taxable sale, use tax needs to be reported and remitted to the proper taxing jurisdiction.

Use tax applies to purchases made outside the taxing jurisdiction but used within the state. It also applies to items purchased exempt from tax, but subsequently used in a taxable manner such as samples.

There are two types of use taxes – Consumer Use Tax and Vendor/Retailer Use Tax. Consumer Use Tax is a tax on the purchaser and is self-assessed by the purchaser on taxable items purchased where the vendor did not collect either a sales or vendor use tax.  The purchaser remits this tax directly to the taxing jurisdiction. Vendor or Retailer Use Tax applies to sales made by a vendor to a customer located outside the vendor’s state or sales in interstate commerce if the vendor is registered in the state of delivery.

Many people are aware of their use tax obligation but choose to ignore it, failing to report and remit use tax on taxable purchases where sales tax wasn’t charged by the seller. The thought process goes like this: “Why do I need to worry about tracking and remitting use tax? The state hasn’t contacted me about it – why should I bother?”

Why Should I Care?

There’s a catch. If you haven’t been contacted by a state about your use tax obligation yet, that doesn’t mean that you won’t in the future. States have been initiating more audits and more aggressive audits. This includes states going after companies with outstanding use tax obligations.

Every business should review their procedures and vendor payments to determine if they have a use tax obligation. Failure to honor the “voluntary” program of self-assessment will likely result in the tax assessment plus interest and penalties under a tax compliance audit.

The use tax isn’t anything new – the obligation to remit use tax has always been on purchasers who aren’t charged sales tax on a taxable purchase.

How Might I Be Targeted for an Audit?

So how do states target possible use tax audits? We’ve seen a number of ways that states are doing this. Here are just a few of the items that can trigger an audit:

  • Late filed returns
  • Large refund requests
  • Large fluctuations in tax liabilities reported
  • Recurring compliance issues
  • Audits of your suppliers
  • Remitting sales tax but never any use tax

If you have outstanding use tax obligations and any of the items above have occurred for your business, you could potentially have an audit target on your back. Depending on the amount of use tax owed for the audit period, this can be a sizable tax obligation. Because of this, it is very important for businesses to evaluate if they have a use tax obligation and put a use tax compliance system in place.

For more helpful information about audits, download the Sales Tax Institute’s FREE whitepaper: Best Practices for Managing a Sales Tax Audit. This whitepaper contains valuable information that can help you go into an audit confident that you’re ready to take on any issues or challenges that the auditor brings to the table.

This blog post was originally published on Linked In:  

Posted on May 31, 2018
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About the Author:

Diane L. Yetter

Founder of the Sales Tax Institute

Diane L. Yetter is a strategist, advisor, speaker, and author in the field of sales and use tax. She is president and founder of YETTER Tax and founder of the Sales Tax Institute. You can find Diane on LinkedIn and Twitter.