What’s Use Tax Like Post SD v. Wayfair?

Use tax compliance is an important issue yet it is frequently neglected or forgotten about when looking at the big picture of keeping your company in compliance.

Let’s first get clear on what use tax is. Use tax is a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax does not apply if sales tax was charged by the seller.

Historically, many companies have viewed their use tax obligation as being too small to take seriously. Chances are the seller charged tax correctly so it’s not worth the time and effort to track and remit.

However, tracking and remitting use tax has always been important, primarily because not doing so creates audit risk. States have been aggressively auditing companies with use tax obligations. Because many companies aren’t even aware that they have a use tax obligation, states are frequently on the lookout for use tax audits.

As with all things sales tax, the South Dakota v. Wayfair decision has resulted in  significant changes regarding use tax tracking and tax validation. Since the Wayfair decision was handed down on June 21, 2018, sellers and suppliers who were not previously collecting sales tax have begun to do so in droves, and this trend will certainly continue as companies scramble to get in compliance.

But here’s the catch: Can you trust that all these companies grappling with their new sales tax obligations are doing so correctly? 

Now more than ever, it’s crucial that someone in your company monitors use tax. If not, your costs could increase and there is a very good chance that you may be overpaying sales and use tax. With that in mind, here are three key items to be aware of regarding use tax compliance and tax validation post-Wayfair.

1. Post-Wayfair, States Will Likely Crack Down on Use Tax Audits.

The first thing to understand is that use tax isn’t a new obligation created post-Wayfair. The obligation to remit use tax has always been on purchasers who aren’t charged sales tax on a taxable purchase.

There are numerous ways that a use tax obligation can be created. One example would be if you make a taxable purchase online and the seller doesn’t charge you sales tax. When this happens, you have a use tax obligation and are responsible for remitting it to the proper taxing jurisdiction. 

Because many companies  aren’t aware that they should be tracking and remitting use tax, this can make you an easy target for a state auditor. So how do the states target companies for a use tax audit? Here are a few of the “red flags” that they look for:

• Remitting sales tax but never remitting use tax
• Audits of your suppliers – if your supplier didn’t handle things correctly or if you provided an exemption certificate that doesn’t seem valid to the auditor, they can start going after their customers. 
• Late filed returns
• Large refund requests
• Large fluctuations in tax liabilities reported
• Recurring compliance issues

If you have outstanding use tax obligations and any of the above have occurred for your business, you could potentially have an audit target on your back. Depending on the amount of use tax your company owes for the audit period, this can result in a considerable tax obligation. Because of this, it is very important to evaluate if your company has a use tax obligation.

Remember: Just because a seller doesn’t charge you sales tax doesn’t mean that you’re off the hook. 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 a tax assessment plus interest and penalties under audit.

2. Vendor Tax Validation is More Important Than Ever Now.

The South Dakota v. Wayfair decision has required many more sellers to register to collect and remit sales tax across the states. Along with this flurry of activity comes the real risk of your company being charged the incorrect amount of tax by sellers.

How can this happen? If you’re an exempt purchaser and a seller doesn’t have your exemption certificate on file, they could easily start charging you sales tax when you shouldn’t be charged. Additionally, sellers may be uncertain on the taxability of some items and either charging you tax when they shouldn’t or not charging you tax when they should. 

For these reasons, it is crucial to validate the amount of tax that you are being charged on your purchases. A few questions to ask when performing vendor tax validation are: 

• Did the seller tax the correct jurisdiction?
• Is the item subject to tax in the jurisdiction where it is delivered and used?
• If the item is taxable, did the seller use the right tax rate based on the item and jurisdiction?

Relying on sellers to make these decisions without validation is simply too risky. No one is going to care more about your compliance than you, including your vendors.

Be sure to develop a vendor tax validation process so your company isn’t charged the incorrect amount of tax and exposed to unnecessary audit risk.

3. Many Companies Don’t Understand Their Liability, But This Can be a Great Opportunity.

Many sales tax professionals have come to us and said that their bosses simply don’t take sales and use tax seriously enough. They don’t realize just how important it is to stay compliant due to the potentially huge tax liabilities they can incur.

If this sounds familiar, there may never be a better opportunity than right now to get your boss’s attention regarding use tax compliance and tax validation and to get a system in place to track and remit use tax.  You will have to overcome their misunderstanding on the need to monitor the tax paid to vendors. We’ve heard from many companies that believe use tax is no longer relevant because everyone will be charging sales tax.  There may be more sellers collecting, but will it be correct? Do you want to take the chance of OVER paying your tax?

Simply put, the Wayfair decision is a once-in-a-lifetime opportunity to bring this outstanding issue to your company and say, “We need to get this taken care of now!”

There are a number of process changes that companies need to consider post-Wayfair. Putting a vendor tax validation process in place as mentioned above is just one of the steps that can get your company in compliance. 

And there are so many benefits to getting a system in place to stay on top of use tax. When tax decisions are made correctly:

• The company saves money
• Audits don’t result in large tax liabilities
• Penalties and interest are minimized in an audit
• There is less impact to company resources
• Work is faster and more accurate, reducing redundant work, mistakes, and associated costs
• Vendors are more satisfied

These all sound like pretty compelling reasons to get your boss on board, right?