Use Tax Is Confusing. There’s lots of confusion about what the use tax is and how companies should handle paying it.
But it isn’t hard to understand; implementation, well, that is another story.
Use tax comes into play when you purchase taxable products or services from a seller that doesn’t have a physical presence in the state where you will use them.
There is generally no obligation on sellers to charge sales tax in such situations. So, the purchaser (YOU) must to make up the difference. You must calculate and pay the tax.
That is use tax.
For example: If you buy a phone from a New York vendor and use it in New York, the vendor will charge sales tax. If you buy the same phone from a company in Florida and they ship it to you in New York, they won’t charge you either Florida or New York sales tax. But you still have to pay use tax in New York. It is up to you to sort all of this out.
So why is use tax complex
Use tax seems pretty straightforward, and most companies recognize their responsibility to pay use tax. Problems originate in implementation.
The first problem is that the seller and the buyer often see things differently, so the invoices are not always right. The vendor doesn’t understand the buyer’s tax regime or and can’t know at all how or where the buyer will use a product.
The buyers themselves often don’t know how or where they will use any given purchase.
Since use and location are significant components of taxability, this is an issue from the beginning.
Managing use tax often lands with Accounts Payable.
But Accounts Payable has a full-time job with processing invoices and writing checks. And, they often do not work closely with the tax department.
Assessing the use tax for each incoming bill is too time-consuming and too expensive, so they use rules to estimate payments.
Sorting out the details behind the rules takes specialized knowledge, so a rule-based approach is the most financially sound approach for an operating company.
However, there is a bias in these rules.
Generally, companies want to avoid an audit (which makes sense even though we see opportunity in audits, read more here). Since paying too little could lead to audit exposure, additional tax or interest and penalties, they typically overestimate and overpay.
The result is that over time most companies are paying a lot more than they should be.
By overestimating use tax, they lose cash that could support and grow their businesses.
But this money is recoverable!
If you think you might be overpaying, you have a right to recover those overpayments.
Every three years, you should review your AP files, use tax returns and capital expenditures then file to recover the money that you paid. Pull them out, group them and look for the opportunities to file for recovery.
Managing this process can be a daunting task for already busy accounting departments. They don’t have time to scour invoices or review the details needed to apply for a refund.
Sales and use tax is all we do. We know how to manage sales and use taxes, and we process your receipts for you. We don’t charge anything unless we recover money from you. And, we also help you fix how you manage sales and use tax so that you overpay less going forward.
Interested in learning more? Check out how we work now to get started. Let us find you more money to grow your business.