Would you believe there is a type of tax that nearly every American is subject to, but only 1.6 percent of people actually pay? When the subject of use tax comes up, most people look at me incredulously, but I promise if you read on, you’ll know it’s not a joke, and with $11.4 billion in uncollected taxes on the line across the country, it is here to stay.
What is use tax? It’s technically an excise tax, charged to both businesses and individuals in the 46 states that charge a sales tax. If you live in a city, county or state that charges a sales tax, you are required to pay that tax on any taxable purchase. But, if you order something online, from an individual who doesn’t charge you sales tax, or you cross county or state lines to another taxing district with a lower tax rate, you haven’t paid your full tax liability. While some retailers are beginning to send out purchase reports at year end, this is not yet a law and very few retailers send reports.
The use tax laws require that if you purchase anything throughout the year and don’t pay your full rate of sales tax on the purchase, you must file an annual tax return to calculate and remit the taxes due. Like income tax, the filing of a return is part of a voluntary system. Citizens are expected to file their returns each year and remit the tax owed. But, while most Americans file their tax returns, only 1.6 percent of people file use tax returns, no doubt that 1.6 percent is made up of attorneys and accountants who can’t claim ignorance when it comes to filing requirements.
As with any tax compliance decision, most people dread an audit that may point out their shortcomings. With use tax, the 98.4 percent of taxpayers who haven’t been filing returns over the years need to start giving it some thought. In my 10 years of practice, I had never seen a use-tax audit until this year and I dealt with a few. Whether from a local agency or a state agency, the attention to this vastly underpaid tax is starting to increase.
How would you fare in an audit? If you choose not to comply and file the required returns, taxpayers should look at this as a risk of doing business or purchasing online. They may go for years without filing, but if they get caught (or, audited, as the case may be), they need to be prepared to provide every purchase receipt for whatever years of time are selected for audit. Without these receipts, the taxing authorities can assume you didn’t pay tax and charge you. Unless you can prove otherwise, the law is on their side.
No doubt, use tax is a reality in our world and needs to be given at least a second thought. You may choose to skip filing your returns and remitting your taxes, but if you are one of the lucky ones chosen for audit, you will be facing interest and penalties, so you need to give strong consideration to your level of compliance.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.