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Understanding Use Tax Can Help Avoid Audit Surprises

author photo of Marc Brandeis

As a former sales tax auditor with the State of California, one of the first things I would do when I began a new audit was to sit down with the taxpayer’s lead accountant to discuss how they reported sales tax. After all, they were accountants; they understood what sales tax was... Next, I would discuss how they ensured compliance with use tax. Most often, they would look at me with blank stares.

Unless you operating a small, single location retail outlet, understanding what use tax is - and how it’s related to sales tax - is absolutely critical to ensure that you don’t get an unpleasant surprise from your next tax auditor. Depending upon the size and scope of your business, failure to properly self-accrue use taxes on self-consumed purchases of tangible personal property or collect and report use tax on sales made in interstate commerce (under certain conditions) can significantly increase your potential tax liability.

Auditors can often spot potential liability by looking at:

  1. Reported purchases subject to use tax. No reported use tax purchases, especially at larger businesses is often a red flag;
  2. Withdrawals from resale inventory. If you held property in resale inventory that you made any use of prior to making a sale in the normal course of business, you may have incurred a liability;
  3. Failing to collect use tax on retail sales of property shipped from one state to purchasers located in another state where you are considered “engaged in business”.

Conversely, some businesses overreport their use taxes by failing to understand how sales and use taxes relate to each other.

With this initial blog entry, I solely wish to convey why it is important to understand what use tax is all about. In subsequent entries we’ll explore more about where hidden use tax liabilities may exist and how you can effectively manage them.

Questions? Comments? BTW - please feel free to suggest use tax topics that are most relevant to your industry.

Other recent “Use Tax” posts by Marc Brandeis:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

8 Responses to Understanding Use Tax Can Help Avoid Audit Surprises

  • Posted by Sara on May 23, 2014 4:51am:

    I work for a heavy equipment dealership providing sales, parts, and service of equipment. If we use parts from our parts inventory on a service work order, and separately state the parts on the service invoice, we tax the parts. Would we owe any use tax on those same parts since we are collecting the tax from the customer? It seems to me that would be "doubling up" the tax on the same part item that is sold.
    Also, if we order and receive a part for a specific customer (as opposed to for our inventory), whether it is sold at our parts counter or whether that part will end up on a service invoice, should we be charging sales tax on the (separately stated) Freight-In?
    Would the taxability or non-taxability on Freight In differ for a normal parts sale with separate freight in vs. a service sale with parts and separate freight in?

    • Posted by Author photo of Marc BrandeisMarc Brandeis on May 25, 2014 11:17pm:

      Hi Sara,
      In order to offer you guidance on your question, I would need to know the following:
      1) In which state(s) does your business operate within?
      2) Does your business offer a maintenance contract with the sale of Heavy Equipment? If so, are they "mandatory" or "optional" contracts? or both?
      3) Do your questions relate to service orders performed under a maintenance contract or to service orders performed without a contract?
      4) Does your state require you dealership to separately state service labor from parts on a service order?
      Best Regards,
      Marc Brandeis, CPA
      Brandeis & Associates, LLC
      Sales & Use Tax Consultants
      (714) 801-1938

  • Posted by Scott on December 17, 2013 3:49am:

    I work for a nonprofit higher education institution in CA. I often receive emails from companies that buy retired computer equipment and resell it as refurbished equipment. Can we accept their offer and what is our tax liability?

    • Posted by Author photo of Marc BrandeisMarc Brandeis on December 17, 2013 4:50am:

      If the company that is purchasing these used computers for resale is located in CA, then you should obtain a "resale certificate" from that company and no tax would be owed by your organization. For more information, refer to regulation 1668, Sales for Resale.
      http://www.boe.ca.gov/lawguides/business/current/btlg/vol1/sutr/1668.html
      Regards,
      Marc Brandeis, CPA
      (714) 801-1938

  • Posted by Russ on December 10, 2013 9:16pm:

    We are a Connecticut company that purchased consulting services from a California firm and were not charged sales tax. Consulting services are taxable in Connecticut. However all work done by the consulting firm has been and will be done in California. No personnel from the consulting firm ever entered Connecticut. Do we as the Connecticut company need to pay use tax on the consulting services to Connecticut?

    • Posted by Author photo of Marc BrandeisMarc Brandeis on December 12, 2013 2:12am:

      Thank you for your question.
      In general, if the "consulting services" you refer to are subject to tax in Connecticut, and the firm providing the service is not engaged in business in CT, then you would be required to self-report use tax on that purchase.
      The "consulting services" you refer to, however, may not be subject to tax. Please refer to the link below to determine if the services you refer to fall within the taxable classification.
      http://www.ct.gov/drs/cwp/view.asp?a=1512&q=269816
      Should you require further assistance, I can be reached at (714) 801-1938.
      Thank you,
      Marc Brandeis, CPA

  • Posted by Rey on November 23, 2012 3:16pm:

    my company manufactured sign and sale all over USA what is the different between sales tax and use tax

    • Posted by Author photo of Susan JaegerSusan Jaeger on November 26, 2012 3:36am:

      Thanks for your questions Rey. SalesTaxSupport.com offers a number of content sections which can provide you with an introduction to U.S. sales/use tax basics.
      1) You'll find a great overview in our Sales Tax 101 section - See http://www.salestaxsupport.com/sales-tax-information/sales-tax-basics.php).
      2) Another great option is our SALES TAX QUESTIONS area - in particular the "Compliance" section. See http://www.salestaxsupport.com/sales-tax-information/sales-tax-help-questions/ . You can also use the drop-down selector on the Sales Tax Questions table (on very bottom of "Compliance" page) to access "Use Tax" questions in our archives. Also - If you are interested in any "cross border" (US/Canada) issues - select the "International" option in the "Sales Tax Topic" drop down selector on that table. Please let us know if you have any other questions...

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