Use Tax Makes a Comeback

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The Marketplace Fairness Act has put a big target on goods purchased out of state or online as a new revenue source for government.

Though it appears to have stalled in the House, the Marketplace Fairness Act has put an even bigger target on goods purchased out of state or online as a new revenue source for government. Most experts agree that taxation of online goods is no longer a question of if, but when. But what many businesses don’t know is that even if the Marketplace Fairness Act does not pass, most states already have a back-up plan in which they can impose a “use tax” for items purchased out of state or online and brought into the state.

What exactly is a use tax? Essentially, if your business makes out-of-state purchases (e.g., furniture, office supplies, electronics, or equipment) without paying state sales tax on them, it is supposed to track such sales and cut the state a check for an amount equivalent to the unpaid tax. Of course, very few individuals pay the tax and most have never even heard of it. Businesses that have not been audited for sales/use tax may also not be aware of their liability. But with states still facing massive budget deficits, the once forgotten “use tax” is making a comeback.

Here are some of the steps states are taking to leave no use tax stone unturned:

1. If you fail to charge one of your customers the proper sales or use tax, and that customer gets audited, then you may also get audited in turn. Current audits provide the best sources and leads for future audits.

2. Some states, such as California and New York, are designing new use tax look-up tables, enabling you pay a safe harbor amount based on taxable income for purchases under a specific dollar threshold.

3. More and more states, such as California, are conducting door-to-door audits to ensure compliance with sales and use tax regulations.

Earlier this year, the California Board of Equalization (BOE) announced it will continue its door-to-door visits. As part of this program, the BOE sent letters to 12,342 business owners notifying them of upcoming visits from Statewide Compliance and Outreach Program (SCOP) teams. The visits are intended to educate retailers about properly reporting sales and use tax.

The program started in 2008 and in that time SCOP teams have visited more than 353,000 business verifying that they are registered and remitting the appropriate sales and use tax. Through this effort (as of February 2013), the BOE has identified more than $2 billion in uncollected taxes contributing to the state’s “tax gap”—the difference between the amount of taxes owed and the amount paid, negatively impacting all state taxpayers.

The bottom line is that whether your business is still looking the other way or simply is not aware of the use tax compliance obligation, the risk of being retroactively assessed taxes and penalties is greater than ever. Plus, the more locations a business operates in, the more complex use tax becomes, so getting in compliance is even more important for larger companies. The only real way to ensure use tax compliance is to maintain domain expertise in determining use tax applicability—either in-house or through an outsourced third party.

Carla Yrjanson, CPA, is vice president of tax research & content for indirect tax for Thomson Reuters.

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A blog from Thomson Reuters, a source of intelligent information for businesses and professionals.

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Carla Yrjanson

Carla Yrjanson is the Vice President of Tax Research & Content for Indirect Tax within Thomson Reuters. She leads the Tax Research & Content Team which is responsible for delivering Sales/Use...

J. Harold McClure

Dr. James Harold McClure, senior manager of transfer pricing at Thomson Reuters, has over 18 years of transfer pricing and valuation experience and has authored a number of papers on the subject....
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