Donna Genie explains use tax: what you owe when you buy taxable goods out-of-state or tax-free but use them at home. She covers when it applies (keeping inventory, out-of-state appliances, business equipment) and how to report it on your income or sales tax return.
Hey, have you heard about use tax? That's a weird one that not many people deal with and you probably have seen it before and may not even realize what it was. So let's talk a little bit about what use tax is and why you may have to pay it. Use tax is similar to sales tax. If you use a piece of property or use some product, or not a service, but a product or something that would be subject to sales tax if it was sold in your state, but instead you buy it from an out of state vendor, you're supposed to pay use tax on that. If it was consumed within your home state, you should be paying use tax on that or sales tax. So if you didn't pay sales tax, you consume it, then you need to remit use tax if there was no sales tax. So another good example, let's say that you resell a product, let's say you resell it and so you buy it with a resale certificate initially. So you don't have to pay sales tax on it because you're going to collect that sales tax from the end user of your product. In that case, if you consume some of that for your own uses and don't resell it, you need to remit use tax on that. So let's give a good example of that. Let's say that you sell picnic tables and you buy 100 picnic tables and you normally resell those, but instead you decide, I'm in need of a new picnic table at home, I'm going to keep one of those for myself. You have to remit use tax on that as if you had originally bought it. If you originally bought that for yourself, you would have had to pay sales tax when it was purchased. So you have to remit use tax. Now, states have realized that people don't really understand use tax much and they don't always do it right. Most cases they don't do it right, period. So they've realized that this is a pretty big money maker if they do a sales tax audit. So we often hear about sales tax audits. They're looking for collection of sales tax. But the real money maker here is use tax things that you may have bought out of state and did not pay sales tax on it. The really big things you want to keep an eye on are when you buy pieces of equipment or machinery that you may use in your business. If you bought that from out of state and that vendor was not required to collect sales tax in your home state where that equipment is going to be used, you may have spent a pretty big chunk of change and not remitted any sales tax. So you would owe use tax on that. How do you pay that? Well, a couple of ways. First, as an individual, if you do this, and this was very popular before Amazon started collecting sales tax, you're supposed to remit it on usually your individual income tax return once a year. Let's stick to businesses for right now. Businesses typically file it on their sales tax return. So if you have a sales tax account and you're already filing either monthly or quarterly, there's generally a collection line on there for use tax as well. If you don't have a sales tax account, let's say you only sell services or you only sell to another person who's going to resell and you're a wholesaler, you may have to file a separate form for just use tax. Some states even have just a general place on their website for sales tax where you can log in just to voluntarily pay the use tax. I say voluntarily, it's voluntary, but it's your legal responsibility to pay that tax. So many years ago people used to say, well, I'll go across the line if you live near a state line to go buy some washer and dryer or a new refrigerator for their house or a new lawnmower, a tractor. And that meant that that person did that vendor did not have to collect the sales tax, so they thought they were saving an extra 5, 6, 7 or 8%. In reality, you're supposed to still be remitting that as use tax, so you're not really saving anything. So double check your processes and procedures and make sure that you are aware of how use tax works. And make sure that you are staying out of trouble by remitting that when it's appropriate. Please follow us on Facebook and Instagram. Please make sure to check out our blog and our website linked below. Subscribe to our YouTube channel and hit the bell to be notified when we post. You can email me@donnacampgroundaccounting.com.
