For the last several years, tax compliance has been a hot-button issue, with many states making sweeping changes to their tax laws. Sales and use taxes are no exception, and compliance can become challenging. For this reason, it’s a good idea for every business owner and manager to understand what these taxes are and some of the common compliance challenges.
The Difference Between Sales and Use Taxes
Sales tax is the tax on a sale, transfer, or exchange of a taxable good or service. This tax generally applies at the point of sale and is assumed by the purchaser. It is usually added to the item’s sales price and charged during the transaction with the consumer. Thus, the business collects sales tax on behalf of the customer and remits the collected funds to the taxing jurisdiction, making it a type of trust tax.
There may be different types of sales taxes imposed by a state. Some states are Seller Privilege Tax states, while others are Consumer Tax states. This determination will define who is ultimately liable for the payment of the taxes. In Seller Privilege Tax states, the seller is liable for the tax. Whereas, in Consumer Tax states, the tax is imposed on the buyer, with the seller assuming responsibility for collection of the taxes and remission of these taxes to the taxing entity.
On the other hand, a use tax is a tax on the storage, use, or consumption of a taxable good or service when no sales tax has been made. Use taxes apply to items that are generally exempt from sales tax. Like sales tax, there are two types, Consumer Use Tax and Vendor/Retailer Use Tax. The Consumer Use Tax is a tax on the purchaser, and it is self-assessed by the purchaser on taxable items when the vendor did not collect the sales or vendor use tax. Under this scenario, the purchaser would pay the tax directly to the taxing jurisdiction. Vendor/Retailer Use Tax is used for sales made by a vendor to a customer located outside the vendor’s state or sales in interstate commerce if the vendor is registered in the state of delivery.
Challenges with Sales and Use Tax Enforcement
Collecting and remitting sales tax is a common aspect of business accounting. Most companies understand the necessity of sales tax and their responsibilities in protecting the trust until payment is paid on the customer’s behalf. However, use taxes can become a bit more challenging, and use taxes implement a different model of tax collection. Under these laws, the customers or buyers are responsible for calculating and submitting the taxes owed.
Use taxes are designed to collect more tax revenue on purchases even when businesses don’t have a mechanism to collect sales tax in that state. Since the taxing jurisdiction can’t hold the company liable to collect sales tax, they hold the in-state residents responsible for paying the tax for the products they purchase out of state and bring into the state.
Enforcement of Sales and Use Taxes
As you can imagine, enforcement for the proper sales and use taxes can become quite a challenge for many states – and by extension, the businesses operating in those states. It is a relatively common scenario for a company to discover they have a nexus in a certain state, and because of this, they are not compliant with tax laws.
One way to move forward after determining you are non-compliant is to explore a voluntary disclosure agreement (VDA). Companies can voluntarily report the taxes they owe in exchange for a limited look-back period. This benefit can be very advantageous when a company has been non-compliant for a number of years. In these scenarios, the company would pay for a certain amount of years in which taxes are due while receiving forgiveness for the time that extends further back.
Other mitigation strategies include:
- Refunding taxes collected
- Prospective registration and compliance
- Remitting the taxes collected or tax liability accrued on a current or prospective return
- Amnesty, which is similar to a VDA with no look-back period
Sales and use tax compliance is a tricky topic, especially for businesses that operate in many states. Each state has unique tax laws, and not all states even impose use taxes. But non-compliance can come with heavy penalties. To learn more about sales and use tax compliance and enforcement, contact Parker Business today. Our skilled team can ensure that you are adhering to the tax laws in all areas where you conduct business.
Parker Business Consulting & Accounting, P.C. is a unique firm with more than a combined 75 years of experience in private industry, coupled with a strong background in public accounting. This combination enables us to provide valuable assistance based on direct experience with many of our clients’ same issues.