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Use Tax: The Snake in the Grass

Jan 9, 2020

Most of our clients here at EisnerAmper, at least the ones that I deal with, have a very good handle on whether or not they should be charging sales tax to their customers. In my experience, while undergoing New Jersey tax audits, the assessment for sales tax is normally small, if anything at all.        

However, we are seeing some serious assessments coming through on use tax for companies under audit. Use tax is, basically, a sales tax on purchases in which tax should have been charged by the vendor, but was not. Use tax is often referred to as the complement to the sales tax. The audit assessments are mostly as a result of doing business with out-of-state vendors who were not required to charge sales tax or in-state vendors who, mistakenly, did not charge the sales tax.   

The recent Supreme Court ruling under Wayfair should certainly mitigate this concern, as more and more out-of-state businesses will be forced to collect sales tax. However, even in light of this Supreme Court ruling, many of your vendors may still not be charging the proper sales tax. To the extent they are not, there will be a need to assess use tax on those purchases and remit this use tax to the proper state taxing authorities.   

Our recommendation is that somewhere in the purchase/accounts payable/disbursement system at your organization, a person (or 2) should be identifying purchase invoices that do not have sales tax charges. It could be the person who opens the mail, inputs the invoices into accounts payable, prepares the checks or signs the checks. Whoever it is should be asking the question “Why no sales tax?” It could be that the goods, services and fixed assets are exempt from sales tax. Or it could be that the vendor isn’t charging it when they should, thus, causing the need for a use tax to be self-charged.

The New Jersey Department of Treasury does an excellent job of explaining the interaction between sales and use tax. In addition, New Jersey, as with other states, provides less strenuous filing requirements for filers who are subject to a relatively small amount of use tax during the year. Make sure to inquire with your home state’s taxing authority for details particular to the state’s filing requirements.

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Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.

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