What is USE tax and why do we have to pay it?
There is a common misconception in business that when you purchase something and the vendor/supplier does not charge you sales tax for whatever reason, the business is not responsible to pay the sales tax. They treat it like a discount, a bonus, yippee – I screwed the MAN. Well, sorry folks, businesses ARE responsible to pay sales tax (retail and manufacturing exemptions noted). If sales tax was not previously paid, and the purchased was being used in a taxable manner USE tax is due. Here are a few common examples of USE tax:
RETAIL – A business that purchases and re-sells items is called a retailer, or wholesaler, depending on exactly who they are selling products to. If the business sells “Widgets”, they do not pay, nor are they required to pay sales tax from the entity that sold them the Widgets (supplier, vendor, and distributor). The business must provide a Certificate of Exemption in order for the supplier not to charge sales tax. When the business then sells the individual Widgets to the public, sales tax is charged, collected and paid to the state. This is all fair, common and straight forward. The problem however comes in when the business USES the Widgets for either themselves, or “samples” out the widgets to prospective customers. Let’s use copy paper as an example for the above Widget. A copy store purchases a lot of paper to resell to the public. However, there is going to be some paper that the company uses itself right? Now a business does not have to go crazy to the page tracking, but some amount should be used. This same store may give reams of paper out to prospective customers as samples in hopes that the customer will purchase many cases of that paper. These are two situations when USE tax comes in. Companies sometimes get into the habit that they are automatically tax exempt because the bulk of their business is reselling items that they purchase. However, you can’t simply provide a tax exemption certificate to every one of your suppliers and not pay sales tax. Office supplies, office furniture, uniforms, shipping supplies, tools etc. These are all common items that are used in a business in a taxable manner and yet sometimes they are not paying sales tax on those purchases. Being Tax Exempt because you are a retailer is much different than being Tax Exempt for being a Charitable Organization or a Non-Profit.
MANUFACTURER – Another area where Use tax comes to play is in the manufacturing arena. Again, as with a retailer the bulk of your vendors or suppliers were probably provided a Certificate of Exemption since when you purchase raw materials, or materials that your business will manipulate into another product to sell, are not required to pay sales tax. The sales tax is paid when the manufacturer sells the product. However, not all purchases are considered tax exempt, depending on how they are used within the company. For example, I once worked for a manufacturer that painted metal parts and pieces that eventually made up office workstations. The metal parts were certainly exempt. The paint was certainly exempt, but what about the masking tape used while painting? What about the stretch wrap used when delivering the parts to the end user? All actual questions that came up during an audit of my records. In the end I was allowed to purchase the stretch wrap without paying sales tax, but not the masking tape. The tape was not entirely used in the manufacturing process – it was like a tool that was used in the process, but not in the actual end product. Another area that was caught during this audit was on purchases from the local hardware store. When we opened up a commercial account with the hardware store, it was set up as being tax exempt. We provided our exemption certificate that showed our “sellers permit” number and we were good to go. The account was set up for us to purchase a case of primer in spray cans that we used now and then. We didn’t use a lot of them, but when we needed them, we would just typically run down to the hardware and grab a case or two. This is all fine and completely legal. However, this account was also used to purchase miscellaneous items that our company used in the day – to – day operations. Floor cleaners, small tools, light bulbs etc would be purchased on this account with no sales tax being paid. BAM – you have USE tax, plus penalty due when the auditor comes around.
ONLINE – Out of State – This is a very common area that both businesses and as tax payers, we as individuals are forgetting about Use tax. If your business purchases office supplies from a cheap, out of state supplier, they may not be required to charge sales tax. If they don’t, you are responsible to pay Use tax on those items. I believe the rule is that if you sell via e-commerce you are not required to charge sales tax unless you have a brick & mortar operation in that state. So if you happen to purchase an office chair from a guy out in California who has no other presence in your state, he is not obligated to charge you sales tax. You, has the end-user however, are obligated to pay USE tax on that purchase.
Why do we pay USE tax? Simple, if we did not have to pay USE tax, everyone would simply purchase items out of state to avoid paying the sales tax on those purchases.
Use tax is a simple amount (exact same rate as applicable sales tax) that can easily be tracked and paid right along with your sales tax on a monthly/quarterly/yearly basis. It is “due” when your sales tax return is due. If you are a retailer or a manufacturer and never have any USE tax, that would be a huge red flag and I would say you most certainly will be audited eventually by the state.