The transaction tax landscape is rife with tricky and complex regulations, and when use tax comes into the equation, it gets even more confusing. But understanding how and when the use tax applies is critical to staying compliant.
Imagine that a railroad company purchases tracks and wooden ties from a manufacturer in Oregon. They spread that track out over a half-dozen states, linking their rail cars all the way to Texas. Where do they pay the tax on the goods they have bought? That’s a much more complicated question than one might think.
For many companies that make large purchases of products used in multiple states, they choose to forgo paying sales tax in the state of purchase and, instead, pay what is called a use tax. Put simply, the corporation pays tax on the products in the state in which they’re being used instead of the state where they were bought. This matter has become even more complicated due to the pandemic and the massive shift to remote work.
Nobody wants to admit their exposures, but they must find ways to address them. While this may seem like a daunting task to tax departments that are already stretched thin — tracking everything from regulatory changes to expanding tax districts — there are a few foundational steps to take that make a big difference.
Err on the side of caution
One relatively simple way to boost use tax compliance is to assume that use tax needs to be factored in situations where it’s unclear. That means reserving money to cover use tax for certain purchases if the company is unsure if those purchases apply.
Booking a reserve to cover the company is always a smart option. There is little risk in setting aside money for use tax. Businesses can easily get the money back in the event that they don't need to pay, whereas non-compliance could end up costing a lot more in the long run.
Play detective
Companies don’t want to be caught off guard during an audit, so they have to continuously reach back and check for missed use tax cases. Through a reverse audit, businesses can identify and remit any unaccounted use taxes. Identifying a business’ tax exposure goes a long way in staying compliant.
Reverse audits also provide the added benefit of catching and recovering any use tax overpayments that might have come from something like the set-asides mentioned above or an overlooked state exemption. This is especially important for companies operating in multiple states.
Utilize technology
Deploying tax technology can catch these use tax cases for companies before they become a problem. The most important component to use tax compliance is a single source of truth for information about transactions that could involve use taxes.
A good tax technology solution relieves the burden of manually reconciling use tax cases by producing that single source of data businesses can rely on to streamline use tax management.
Beyond that, deploying tax software will have positive ripple effects, including generating more information on organizational spending and promoting better planning of tax spending opportunities. In addition, tax technology can make the monthly use tax compliance process more efficient overall and save time that’s often wasted on unnecessary processes like manual reconciliation.
While these tips only scratch the surface of use tax, they are crucial components in compliance. By employing these foundational processes, businesses can stand confidently, knowing they’ve done everything to capture the proper taxes, especially in the face of an audit.
