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July 2010
Being audited by the state? Be sure your use tax is paid!
By Jack Schmoll

     In this era of deficits and shortfalls, state auditors are becoming more aggressive in their scrutiny of sales and use tax paid by businesses.

 

»Use Tax 101 | Use tax is regularly the cause of large tax assessments and is the alter ego of sales tax. Tangible items purchased by consumers are generally subject to sales tax. If sales tax were not charged on the initial sale, use tax would become due in the same amount the sales tax would have been, if the vendor had charged it. A primary difference between use tax and sales tax is that sales tax is paid to the vendor and use tax is generally paid directly to the government.

 

»Bargain or Burden | Many businesses are happy when they avoid sales tax when purchasing items like computers or supplies online, but what they may not know is that a use tax liability is generated as soon as they receive the property. Since taxpayers are often unaware of this tax or not properly self-assessing, states center a great deal of attention on this issue. Their auditors will focus heavily on purchases made from out-of-state vendors and purchases made online.

 

»Auditor Scrutiny | Auditors will dig deeply, examining even the most complicated situations. For instance, purchases of checks by a bank may or may not be subject to tax depending on what the bank does with the checks. If a bank gives them to customers, it creates a use tax. But if the bank sells them to customers with a sales tax charge, use tax is avoided.

     Database subscriptions, software licenses, and software maintenance and support agreements are also items that auditors will surely review. Beware; states treat these items differently for sales and use tax purposes, so vendors and end users are often confused as to whether sales or use tax is due. For example, remote access to databases (access to a research tool over the Internet, for example) is subject to sales tax in South Carolina but not in North Carolina. These fine gradations in taxability make it difficult for taxpayers to comply, thus attracting the attention of auditors.

     Other areas of interest for auditors include supplies, computers and peripherals, equipment, furniture, promotional items, and signage, among other things.

 

»Prepare Your Business | It is important for businesses to have processes in place to properly self assess and pay use tax in order to avoid assessments and penalties. These processes will vary from business to business depending on purchasing volumes, purchasing patterns and staffing.

     Payment of current use tax will not exempt your business from audit requirements. However, in our experience, businesses with no use tax payments and no system in place to address this issue are more likely to be targets. Also, keep in mind that your exposure will continue to build as long as a system to calculate and pay any amounts due is not in place. An experienced state and local tax advisor can help your business develop procedures to pay the proper amount of use tax and avoid unwelcome tax assessments.

     Content contributed by the Charlotte office of Elliott Davis, PLLC, an accounting, tax and consulting services firm providing clients the solutions needed to achieve their objectives in 10 offices throughout the Southeast. For more information, contact Dan Warren at 704-808-5210 or visit www.elliottdavis.com.

CPA, Senior Manager, Elliott Davis, PLLC
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