Keeping Track of Use Tax and Avoiding Surprise Audits

Use TaxUse tax and sales tax both are used to fund state and local services paid for by the states. And dodging either of them, intentionally or unintentionally, constitutes non-compliance and puts you and your business at risk for audits.

In general, use tax is a tax on the use, storage, or consumption of property. Most states impose a use tax in order to avoid losing tax revenues on sales transactions that take place outside the state. In other words, if you purchased tangible personal property out-of-state (and therefore did NOT pay sales tax) but you store, use, or consume the items in your state, you will most likely owe use tax.

Why is there a use tax? If your purchase is made In-state, retailers are required to collect tax, but out-of-state retailers are not. The opportunity to not pay sales tax drives many purchases out of state which affects the capability of brick-and-mortar stores to compete, and the amount of tax revenue collected by the state is reduced.

Lately, with the addition of a huge online market, the lines have gotten blurred as online retailers do not want the added burden of state tax on purchases, but states also want to be fair to the “brick-and-mortar” retailers who must pay sales taxes that online retailers can side-step. But what you need to know is this: keep track of whether or not the online retailer charges you sales tax. If they don’t, you probably owe use tax, which will be same rate as the sales tax in your area. If you purchase items that are normally exempt from sales tax, they will also be exempt from use tax as well.

To remit this tax, include on your sales tax return (if required to file) or pay with your income tax return.