Why Use Tax is in the Spotlight and How to Stay Compliant

If you’re running a business, you’re probably familiar with sales tax. But have you heard of use tax? Recently, it’s become a hot topic, and with use tax scrutiny now on the rise during sales tax audits, it’s more important than ever to understand what it is, why states are paying closer attention, and how your business can stay compliant.

In this post, we’ll cover the essentials of use tax, why it’s getting so much attention, and the steps you can take to avoid costly surprises.

What is Use Tax, and How is It Different from Sales Tax?

Use tax is a tax on the use, storage, or consumption of goods or services within a state when sales tax hasn’t been collected at the point of purchase. In other words, if your business buys something from a supplier that doesn’t charge sales tax, you’re likely responsible for paying use tax on that purchase.

Here’s a quick example: let’s say you’re a retailer in Texas, and you buy office supplies from a vendor who doesn’t collect Texas sales tax. You’re responsible for calculating and remitting the use tax to Texas. Essentially, use tax ensures that out-of-state or untaxed purchases don’t slip through the cracks.

For a deeper dive, you can read more in our post on the difference between sales and use tax.

Why Use Tax is Under Increased Scrutiny

With the rise of remote work and e-commerce, many companies are buying supplies, digital services, and equipment from out-of-state or international suppliers, sometimes unaware of their use tax obligations. States are starting to pay more attention, and use tax audits are now more common.

Here are a few reasons why use tax compliance is now in the spotlight:

1. Revenue Gaps: States depend on tax revenue, and use tax compliance helps capture revenue that could be missed if businesses don’t self-report.
2. The Growth of Digital Commerce: More purchases are being made online, often from vendors who don’t collect sales tax, which increases the burden on businesses to calculate and remit use tax.
3. State Budget Constraints: Many states have tightened their budgets and are now actively pursuing tax audits as a way to recoup funds. By enforcing use tax, states ensure that businesses contribute fairly, even if the purchases come from out-of-state suppliers.

Common Scenarios that Trigger Use Tax

Understanding when use tax applies can help keep your business compliant. Here are some scenarios to watch for:

• Purchases from Out-of-State Vendors: Buying equipment, supplies, or materials from out-of-state suppliers? If they don’t collect your state’s sales tax, you’ll need to remit use tax.
• Using Inventory In-House: If you buy items for resale but later use them internally, this typically triggers use tax. For instance, if your company uses certain tech parts for internal projects, that portion may be subject to use tax.
• Digital Services and Subscriptions: Software subscriptions or cloud-based services purchased from out-of-state vendors are often untaxed at purchase but may still require use tax.

What Businesses Need to Know About Use Tax Compliance

A proactive approach to managing use tax can prevent headaches down the road. Here’s what to consider:

1. Maintain Detailed Purchase Records: Keep clear records of untaxed purchases to streamline tracking and calculating use tax.
2. Educate Your Accounting and Procurement Teams: Make sure your teams understand when use tax applies and how to identify taxable transactions.
3. Conduct Regular Self-Audits: Regularly reviewing purchase records for unreported use tax can help you identify liabilities before an audit. A self-audit can reveal any gaps and ensure your compliance is up to date. 

The Risks of Non-Compliance

If your business is audited and found to be non-compliant, it could mean steep penalties. Here are a few key risks:

• Audit Triggers: High volumes of out-of-state purchases or previous audit findings can increase the chance of future audits.
• Penalties and Interest: Non-compliance often results in interest on unpaid taxes, fines, and other penalties.
• Reputation Risks: Non-compliance can impact your business’s reputation with clients and partners who prioritize compliance.

Simplify Use Tax Compliance with TaxValet

Managing sales and use tax compliance doesn’t have to be a headache. TaxValet’s white-glove service handles every aspect of your sales and use tax process, giving you peace of mind and letting you focus on what you do best. Ready to make tax compliance hassle-free? Get started with a free sales tax plan and let's see how we can take this burden off your plate.