When a company makes a taxable purchase from a vendor that is not required to charge sales tax in their state the company is required to accrue and remit use tax to the state. Even if the company is not required to collect sales tax from their customers, they are required to accrue and remit use tax on purchases. Unfortunately, most companies do not comply with the use tax rules until they are faced with a six-figure audit assessment.
Use Tax Compliance
Step 1 – Decide on a Decision Maker
In general most small to medium-sized businesses choose accounts payable (A/P). The A/P clerk is entering the data into your accounting software and usually has physical access to the invoices. This is important because the decision maker HAS to have a copy or image of the invoice available to make a proper decision. Some will argue that A/P is not equipped to make the decisions. Most of your purchases are reoccurring, and although there is a learning curve A/P is best suited for the task.
Step 2 – Implement a Process
When A/P receives the invoice, they must confirm if sales tax has been charged. If the answer is yes, then move on, no use tax is needed. Some companies may request A/P to check the sales tax rate or see if an exemption applies. This is an ideal process if it can be implemented. However, this tends to reduce the processing time and most A/P clerks are focused on how many invoices were paid today and not the accuracy of sales tax.
If sales tax is not on the invoice the A/P clerk will need to refer to a state-specific tax matrix provided by your accounting or tax department. This tax matrix categorizes purchases (services and property) into taxable or exempt transactions. REMEMBER you need a tax matrix for each state or one that covers multiple states as the rules can vary drastically.
Step 3 – Aggregate Any Taxable Transactions
If your accounting software offers a field to add the use tax or a check-the-box feature, that is preferred. If you have no way to capture the use tax into your accounting software, you can scan the images into a folder by month. This information will be used by the group responsible for reporting sales & use tax. Many companies will utilize a use tax stamp for each invoice, which is helpful during a tax audit. Other companies will have A/P record each transaction on a spreadsheet and then forward the data at the end of each period to the responsible party. You have to create an audit trail from the point of the decision maker to the person ultimately responsible for filing sales & use tax returns.
Step 4 – Complete Your Returns
The final step is for the monthly or quarterly sales & use tax returns to be completed (usually online) and then a file stored with copies of the documents used to support the returns. If you have any questions, please contact any of our service leaders for additional assistance.