As a business owner, you are likely familiar with sales tax, but there’s another tax you need to be aware of: use tax. Use tax often goes unnoticed until it becomes a problem, but understanding it can help you avoid costly surprises down the road.
What is Use Tax?
Use tax is a tax imposed on the use, storage, or consumption of goods within a state when sales tax has not been collected. Essentially, if you buy a product from an out-of-state vendor and that vendor doesn’t charge you your state’s sales tax, you are responsible for paying the equivalent tax—known as use tax—directly to your state.
When Does Use Tax Apply?
Use tax typically comes into play when you purchase goods from an out-of-state seller, especially through online transactions or direct purchases from vendors who do not have a presence in your state. This can include anything from office supplies and computers to large equipment like machinery or vehicles. If you’re buying big-ticket items, such as equipment for your business, from out-of-state sellers, it’s crucial to be mindful of use tax obligations.
For example, suppose you purchase a $10,000 piece of machinery from an out-of-state vendor who doesn’t charge sales tax. If your state has a 7% sales tax rate, you are required to pay $700 in use tax to your state.
How to Report Use Tax
Reporting and paying use tax is typically done through your state’s Department of Revenue. Many states allow businesses to report use tax on their regular sales tax return. If your business is not required to file sales tax returns, you may still need to file a separate use tax return. The specific process varies by state, so it’s important to consult your CPA or state’s guidelines to ensure compliance.
Why Should You Care?
Ignoring use tax obligations can lead to penalties, interest, and even audits. States are becoming increasingly vigilant in enforcing use tax laws, especially as more transactions occur online and across state lines. Failing to pay use tax can result in back taxes owed plus additional charges, which can be a significant burden on your business.
Questions
Staying aware of your use tax obligations is crucial, particularly when making out-of-state purchases. Properly accounting for use tax not only keeps your business compliant but also helps you avoid unexpected financial setbacks. If you’re unsure about your use tax responsibilities, reach out to us for guidance—we’re here to help you navigate these often-overlooked tax requirements. If you have any questions, please do not hesitate to contact TrueBlaze Advisors.