Sales tax compliance is possibly one of the most difficult areas of state taxation to navigate for some businesses. State budgets can rely heavily on the revenue generated from sales tax, which requires businesses to be diligent in their efforts to comply with reporting requirements. Part of that compliance effort requires businesses to know when they have not been charged the proper sales tax and to remit use tax.
This article will discuss the differences between sales tax and use tax, which can often be confusing for consumers of taxable goods and services.
Sales tax is imposed on the retail sale of taxable goods and services and is collected by the seller at the time of the transaction. The imposition of sales tax by a seller depends on several factors such as nexus and related exemptions. Sellers are only required to charge sales tax if they have nexus with the state where the goods and services are delivered or performed.
Prior to Wayfair, remote sellers often lacked nexus and did not charge customers sales tax. Enter the use tax obligation of consumers, businesses, and individuals alike, to remit the proper tax to the state where the consumer will actually use the product.
Consider a consumer who resides in Pennsylvania, travels to Delaware to purchase a TV, and takes possession of the TV in Delaware. Because Delaware does not impose sales tax, the seller does not charge the consumer any sales tax. However, when the consumer brings the TV home to their residence in Pennsylvania, they must remit use tax to the State of Pennsylvania.
Businesses can encounter similar issues when they purchase materials in one state to be used in another state. For example, a business may purchase taxable materials in Pennsylvania to be used on a project in New York. If the materials are delivered to the business’ location in Pennsylvania, it will pay sales tax at the rate of six percent. However, if those taxable materials are used or consumed by the business in New York, where the state and local rate can be more than eight percent, the business will need to remit the additional use tax to New York.
Because the remittance of use tax is dependent on the voluntary compliance of the consumer, the tax will often go unreported to the state and states have a difficult time enforcing use tax collection when the consumer is an individual. However, when the consumer is a business, states have more tools available to recover use taxes. The most frequently used tool is the dreaded sales and use tax audit.
One reason a business may not comply with use tax requirements is the administrative burden needed to do so. Sales and use tax audits are designed to identify whether a business is compliant with both its sales and use tax obligations. The audit will focus on a business’ sales to its customers, as well as its purchases from vendors, to determine whether the applicable tax has been collected and remitted to the state.
Sales and use tax audits are on the rise and businesses need to be more diligent than ever to comply with state sales and use tax reporting requirements. Reviewing vendor purchases to identify those that are not charging sales tax will be a good way to determine whether there may be a use tax reporting obligation. Likewise, if a business is not charging customers sales tax on the retail sale of a taxable product or service, it should examine whether that is appropriate. Taking these steps could help your business avoid a sales and/or use tax assessment in the future.
If you have any questions regarding your sales and use tax obligations, please contact Thomas Frascella, Director, Tax Strategies and State and Local Tax Group Leader, or any member of our State and Local Tax team.
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