Preface: Assurance services with regards to sales tax are advised for entrepreneurial business’s, because charges from tax audits can be expensive. Appropriate sales and use tax compliance costs can repay your business with greater confidence of lower audit risk, to happier customers from reductions in unnecessary charges.
Sales and Use Tax Compliance and Assurance is Advised Before an Audit
Credit: Donald J. Sauder, CPA
Sales tax is an increasingly important tax compliance area for many businesses. Sales tax can be charged at more than just the state level. Forty-five states impose sales and use tax on purchases of tangible goods, and 4,696 cities and 1,602 counties also impose sales tax. If you’re conducting business across state lines, you should assess your nexus for jurisdictional sales and use tax compliance risks. More importantly for your customers, these sales tax deductions continue to be an itemized deduction on Schedule A with the passage of 2015 “tax extenders” bill, called Protecting Americans Tax Hikes (PATH).
Sales tax is often assessed on the retail level for sales of inventory or services, or transfers and exchanges of taxable inventory or services. All sales are presumed taxable at the retail level unless proven otherwise. Sales tax is added to the price of the product or service and remitted to the state by the seller who charges and collects the tax. Your business purchases a new snow blower from Your Hardware Superstore, sales tax is charged on the sale, and the seller, Your Hardware Superstore, remits that sales tax to the state. The complexity begins with special sales tax rules state-to-state specific on inventory items or services. Investing in sales tax compliance assurance is advised for every business.
Use tax, on the other hand, is a tax on the use or consumption of a taxable item or service when no sales has been charged or paid. The tax often applies to purchases made outside the state and used in the state, such as when you live in Pennsylvania and purchase a snow blower in Delaware from Snowblower Central. Then you need to pay use tax on the purchase. Use tax also applies to goods initially bought exempt from sales tax, but used for a non-exempt purpose. Use tax can be self-assessed and paid to the state, or collected from the customer from an out-of-state vendor registered with the purchaser’s state. Investing in use tax compliance assurance is advised for every business.
Use tax rates are the same as sales tax rates. Use tax levels the playing field for in-state vendors to keep them from pricing advantages of purchasing in sales-tax-free zones. States with budget concerns are now placing more scrutiny on sales tax with expanded jurisdiction on out-of-state vendors, increasing audit aggressiveness, expanding the tax base to include more inventory items and services, and sometimes increasing the tax rates.
The seller is primarily responsible and liable for collecting and paying the sales tax, whether they have collected the tax or not on the sale. Most often, a vendor must collect tax with respect to taxable sales unless the customer or client shows a valid exemption certificate. If the seller fails to assess sales tax, the state can collect that tax from either the seller or purchaser. Yet, often the vendor pays the tax as an additional expense in instances where collection is overlooked. This can be expensive. While the vendor has the right to collect from the purchaser, it may be impractical or imprudent. Even if the vendor is fortunate enough to collect the tax from the customer after the fact, the penalties, interest, and cost of collection can be steep.
In summary, if your business sells inventory or services, be sure to follow proper sales and use tax guidelines and regulation, collecting and remitting the appropriate taxes on applicable sales. Talk with a tax expert for sales and use tax assurance, especially when adding new inventory items or services in your business, or selling into foreign tax jurisdictions.