When everyone battled to complete their income taxes, one year-round, “self-assessed” state and local tax continues to be overlooked by many in the snow management industry. While few snow and ice management businesses are required to collect a sales tax, frequently neglected is their liability for the related tax on the “use” of sales-tax-liable purchases.
The “use” tax affects everyone buying tax-free supplies, equipment and more online, in another state or from a seller – that fails to pay the required tax on that purchase in the buyer’s home state.
All this fuss over a sales tax that is supposed to be collected by the seller – but all-too-often often isn’t? Yes, despite a ruling by the U.S. Supreme Court that requires sellers to collect sales taxes on all out-of-state sales, many transactions continue to slip through the cracks. And remember, ultimate responsibility for payment of those state and local taxes is on the shoulders of the purchaser.
SALES TAXES FROM BOTH SIDES
Frequently overlooked by many snow and ice management contractors, the well-known sales tax, is generally broken down into three types:
Transaction Privilege taxes are imposed on sellers (and an increasing number of service providers) for the privilege of making sales within the state. Sellers usually have the option of absorbing the tax, in other words, paying it out of their own pockets, or passing it along to their customers.
Sales taxes are the basic, more familiar transaction tax, calculated as a percentage of the sales price of taxable goods and some services. The sales tax is usually collected by the seller on behalf of the taxing authority. Because the tax is primarily the buyer’s responsibility, unlike transaction privilege taxes, sellers don’t have the option of absorbing the tax.
Retail transaction taxes are imposed on the sale transaction itself, with the primary liability for paying the tax falling on both the seller and the buyer. Sellers are responsible for collecting and paying the tax, while buyers are responsible for paying any tax which should have been collected but wasn’t.
The majority of states have a basic sales tax, where the buyer bears the legal burden of the tax and the seller is required to collect and remit the tax to the state. Only a few states have the seller privilege tax option. From the perspective of the buying snow contractor, understanding the type of tax they are confronting can help in dealing with sales taxes that are not billed or collected.
When dealing with a transaction or vendor privilege tax, for example, no contractor or snow and ice management business should voluntarily pay any tax that hasn’t been billed to them because the tax is the seller’s responsibility. Obviously, when dealing with a consumer excise or retail transaction tax, unbilled taxes should not be ignored.
Unless there is some written proof that the tax was paid, the snow removal operation, the buyer, can be held liable for the unpaid tax. Which brings up the so-called “use” tax imposed in 45 states but actually paid by less than 2% of those required to pay on taxable transactions where sales taxes were not collected.
Where there is a sales tax, there is usually a use tax. The use tax typically applies only to purchases where no sales tax was collected.
In most cases, the use tax applies when a taxable item is sold in another state where there may be no sales tax or the seller doesn’t have sales tax “nexus.” Without nexus the seller is not responsible for remitting sales tax on the purchase to that other taxing jurisdiction – at least that was the case prior to the Supreme Court’s decision in the South Dakota v. Wayfair, Inc. case.
On June 21, 2018, the U.S. Supreme Court ruled that states can require an out-of-state seller to collect and remit sales tax on sales to customers in another state even if the seller has no physical presence in the buyer’s state. All-too-often sellers fail to comply leaving buyers liable for the unpaid sales tax. In even more cases, the snow and ice management operation becomes liable when items acquired “free-from-tax” are converted to a taxable use.
USING FORMERLY SALES TAX-FREE SUPPLIES AND GOODS
It can be as simple as a printer or copy shop pulling a ream of paper off the shelf for use in their office. Another business might find itself owing a use tax for charitable donations of previously non-taxable goods or products intended for resale to raffle off at a charitable auction.
Under the majority of state laws, it is how certain goods, products or commodities in the business are “consumed” that is usually the determining factor in determining use tax liability. Common triggers include the already mentioned charitable donations along with:
- Inventory transfers
- Promotional giveaways, and
- Fixed asset purchases
If items were intended for resale and no sales tax was paid at the time of purchase, the business is obligated to pay the use tax. Or, if equipment or office furniture was purchased for the operation, which then moved to a new location where the tax rate may be higher, the difference in use taxes may be owed.
The use tax must also be paid when a snow removal contractor purchases a taxable item in jurisdictions with a lower tax rate than the rate in the state where they do business. If the operation buys a vehicle in Oregon where they have no sales tax, for instance, they’re likely to owe tax in their home state. Purchases made in other countries are also subject to use taxes. Regardless, the burden to report and pay lies on the buyer.
A COMPLEMENTARY TAX
State and local use taxes are designed to be no broader in scope than the sales tax and carry the same rate. Their rate is left up to the state or local tax authority where the snow management operation or business uses, stores, or consumes the purchased item.
The basis for computing the use tax is generally the “selling price” of the property – just as it is for the sales tax. For the most part, exemptions are also the same for both the sales and use taxes.
A buyer is entitled to a credit for sales taxes paid. Buyers are allowed a tax credit for sales taxes paid to another state for the same property. So, use tax liability can be offset by sales tax paid on the purchase.
Use taxes are self-assessed. The biggest difference between a state’s sales tax and its use tax is the manner in which they are assessed and paid. For the most part, sales taxes are assessed and collected by the seller. In contrast, the responsibility for reporting and paying any uncollected taxes generally falls on the buyer.
Because the triggering event for the tax – the taxable “use” of the property in the state – occurs after the sale is completed, use tax is owed by a buyer every time sales tax is not paid in full by the seller. Unlike the sales tax, the use tax can be triggered after a transaction, based on how and where products/items are used by the buyer.
Many snow and ice management businesses regularly purchase supplies, goods, products and even equipment out-of-state, business-to-business or via the Internet. State and local lawmakers, aware of this strategy, long ago included a “use” tax on otherwise taxable purchases made outside their jurisdictions to avoid sales tax.
Checking that expenses, fixed assets and inventory transfers have been properly taxed is how many auditors spend their time. It is also where most mistakes are easily discovered. After all, the systems used by snow removal operations to track their spending are often the same systems auditors use to discover tax liabilities.
State auditors claim sale and use tax errors are the number one audit target with the bulk of assessments coming from the use tax not being paid. Failing to report use tax is easily detected by auditor and, obviously, can prove expensive. So, why do so many contractors overlook the use tax?
Often their complacency derives from not understanding the use tax rules or the necessity of paying it. Thus, every snow professional should avoid removing purchased items from inventory without either paying the necessary sales tax or remitting the use tax to the state or local taxing agency.
Ultimately, it is the snow removal business that is responsible for ensuring the sales and use tax rules are handled correctly. Vendors don’t always get it right so if a sale is exempt, a valid resale or exemption certificate should be referenced.
And, don’t forget to verify tax rates are correct. Compare the tax shown on the invoice with what should have been collected. Be sure expense reports include sales tax for any taxable transactions, since these are all areas where tax auditors find mistakes.