Multi-state businesses need to understand their State & Local Tax (SALT) exposures and liabilities. These liabilities generally exist across Sales Tax, Income Tax, and Withholdings Tax but can also include other areas.
‘Nexus’ is typically the trigger for SALT exposures and liabilities, which occurs when there is a sufficient physical or economic connection with the state in question.
However, even in states where businesses haven’t established Nexus, there still may be various SALT reporting requirements.
Businesses categorized as ‘non-collectors’, which are companies that are not obligated to collect Sales Tax from their customers (due to insufficient nexus with the state in question), may still have reporting obligations for ‘Use Tax.’
What is Use Tax?
Use Tax imposes a Sales Tax on taxable purchases that consumers make outside their state of residence for items intended for use, storage, or consumption within their state of residence, and for which no tax was collected by the vendor in the state of purchase.
Why is Use Tax important to taxing authorities?
As demonstrated by the case of South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), the lack of reporting, accruing, and remitting of Use Tax to taxing authorities can be costly to those authorities’ annual revenues. In the Wayfair case, estimators determined that South Dakota annually lost between $48-55 million on taxable purchases, where vendors did not charge Sales Tax and purchasers did not accrue and remit Use Tax. As a result, states are implementing Use Tax reporting requirements and stricter economic Sales Tax Nexus thresholds to address the issue.
What is Use Tax Reporting?
There are instances where the state expects a non-Sales Tax Collecting company to notify its customers that they may be required to accrue and remit Use Tax on their own. This notification to customers is referred to as ‘Use Tax reporting’.
What do Use Tax reporting requirements look like?
States vary in their Use Tax reporting laws, and some states do not have any such reporting laws at all. However, for those states that do, the rules generally include the requirement to:
- Notify customers about their obligations to report and pay Use Tax when Sales Tax was not collected on their purchase.
- Provide an annual purchase summary to customers; and
- Send an annual customer information report to the relevant state taxing authority.
What are the penalties for not reporting Use Tax where requirements exist?
Failure to comply with a state’s non-Sales Tax collecting Use Tax reporting law can result in costly fees and penalties.
For example, Colorado charges non-Sales Tax collecting retailers a penalty of $5 for each sale to a Colorado purchaser that does not provide a transactional notice to accrue and remit Use Tax. These fees compound over time and can equate to a large expense.
How can Leyton help non-Sales Tax collectors with determining Use Tax reporting requirements?
- Conduct a Nexus Study to ascertain whether the company has established a Sales & Use Tax nexus.
- Undertake an analysis in states where no Nexus has been established to determine the continued relevance of the Use Tax reporting requirements.
- Assist with preparing a Voluntary Disclosure Agreement (VDA) for instances where Use Tax reporting was meant to be done but was not.
References
Consumer Use Tax | Retailer Reporting Requirements | Department of Revenue – Taxation. (n.d.). https://tax.colorado.gov/use-tax-retailer-reporting-requirements
South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). (n.d.). Justia Law. https://supreme.justia.com/cases/federal/us/585/17-494/#:~:text=Under%20earlier%20Supreme%20Court%20decisions%2C%20states%20could%20not,estimated%20that%20South%20Dakota%20lost%20%2448-%2458%20million%20annually
