Episode 148: The 101 on Use Tax

On this episode of the podcast my guest, Amy Monroe, talks about use tax and the difference between income tax and sales tax.

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Income taxes impact a business's bottom line. These are what income tax brackets are based off.

Sales tax is subject to sales of physical goods and products. Learn more about the exceptions to this on episode 21 of the podcast.

Use tax is sometimes referred to as the other side of the same coin as sales tax. You can look at use tax from the point of view of a consumer and the point of view of a business owner.

If you bought something from an online retailer that didn't collect sales tax from you, technically at the end of the year you would self-report the use tax (the sales tax that should have been collected) because you are the user of the thing you purchased. For example, use tax pops up in a business to business scenario when you buy from a vendor or buy wholesale with the intention of turning around and selling it to your customer. Instead of paying the vendor sales tax you would issue them a resale certificate that says I am going to take care of the sales tax when I send this to the end use consumer, so you don't have to charge sales tax to me. If you decide to remove the items from retail, for example, use them in a giveaway, you now become the user of the item and should therefore remit use tax on the cost of the thing you purchased from your wholesale vendor.

If what you are selling as a service-based business is not subject to sales tax, then any goods you purchase as a business you are the consumer of and should be be subject to sales tax. If your vendor does not collect, you should remit the use tax.

Example - If I'm an interior designer and I sign up as a wholesaler, I get to buy product from a furniture store with no sales tax. I buy a sofa wholesale for $2,000 with no sales tax and I intend to resell it to my client for $2,500. I issue a resale certificate to the wholesaler. Most certificates are blanket certificates so you don't need to refile a resale certificate with every purpose. You must have a sellers permit in order to issue a resale certificate. If I decide I like the sofa and I plan to keep it for my own house, I must now pay use tax since I am the one using the sofa. There is a line item on your quarterly sales tax return that asks the value of all the purchases you made that you did not pay sales tax on. You apply the local sales tax rate and then you self report that use tax and it comes out of your pocket. This does not apply when you hold inventory as you still plan to sell those items and charge sales tax when you do. If you do pay tax to your wholesaler for the $2,000 sofa, some states will have you just charge sales tax on the markup, so sales tax on $500 in the example of the $2,500 resale. Some states say charge it on the whole retail value and then on your quarterly return you get a credit that your sales tax is paid.

Are there issues with multi-state use tax? Sometimes. The use tax is often where the use of the item occurred. It can get complicated, but do your best.

Due to the nexus rules, use tax is becoming less of an issue. Prior to June 2018, the last time there had been changes to use tax rules was 1992. Prior to June 2018, when you bought something from an online retailer, chances are you didn't pay sales tax. In 2018 the Supreme Court ruled on the South Dakota v. Wayfair case and so many companies then were required to collect sales tax on the vast majority of their transactions which eliminated the burden of consumer use tax.

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Get in touch with our guest

Amy Monroe, Sales Tax Guru

Follow Amy on Instagram at @iamamymonroe