If your business has ever been audited by the WV State Tax Department the result may have included a very expensive vocabulary lesson. It is a lesson that forever stamps the phrase “Use Tax” into your, the owner’s, lexicon.
Most business owners are very familiar with the proper collection and remittance of sales tax. One section, the Use Tax section, of your sales tax return, however, remains unnoticed by many until an auditor tallies up a jaw-dropping deficiency bill. In today’s article, I will discuss the basics of Use Tax. My goal is to help trigger a spark of “Use Tax” recognition long before an auditor asks to see years of receipts for major purchases.
Use Tax Defined: According the tax department, Use Tax is “imposed upon the use within West Virginia of tangible personal property and services bought or leased outside West Virginia for use or consumption within this State.” What this basically means is if you (Yes you. Use tax can also apply to individuals.) or your business purchase an item (or contract for a service) from a location outside West Virginia and bring it into West Virginia (where it is used, consumed, or the service is performed), that purchase is subject to the same sales tax rules as any other West Virginia purchase. The difference is that under these circumstances the tax is called Use Tax, not sales tax, and it is the buyer’s responsibility to pay, not the seller’s. The buyer must report and pay Use Tax but will get a credit for any sale tax paid to the state where the items were originally purchased.
Here are some common situations that get taxpayers into trouble:
Situation: You buy $10,000 worth of computer equipment for your West Virginia office from an online computer vendor. The vendor does not charge sales tax. Your business must remit the $600 (10,000 * 6%) in Use Tax to the West Virginia Department of Tax and Revenue.
Situation: You purchase a $30,000 piece of heavy equipment in another state and bring it into West Virginia for use in your construction business. You do not pay sales tax on the purchase. You must remit $1,800 (30,000 * 6%) in Use Tax to WV.
Situation: You hire a doctor from another state who comes into West Virginia to conduct physicals on your employees. Although the services are performed in West Virginia they are exempt from sales tax as a professional service and, therefore, are not taxable. You do not owe Use Tax on this purchase.
Situation: As a final example, consider this common scenario: Your office manager lives in Virginia. She routinely purchases office supplies for your West Virginia office in Virginia. Over the course of the year, she purchases $10,000 of supplies using your business credit card. These purchases are subject to Use Tax but you get a credit for taxes paid to Virginia. Since Virginia has a tax rate of 5% (4% state and 1% local) you will get a Use Tax credit for the $500 sales tax ($10,000 * 5%) paid to Virginia. But, because West Virginia has a tax rate of 6% you will still owe $100 ($10,000 * 6% = $600, minus $500 = $100) to West Virginia on these purchases.
An Undue Burden: Many would argue that the complexity and reporting requirements of Use Tax place an undue burden on taxpayers. Most business owners simply don’t have time to review every purchase for potential Use Tax liability and they don’t have the money to pay their accountant to analyze every receipt. On the other hand, the state might argue that noncompliance results in millions of lost tax dollars, a situation that has gotten worse with the growth of internet purchases. They might also argue that out-of-state sellers who do not follow the same rules have an unfair advantage over in-state sellers of the same products. This unfair advantage drains money from both the local economy as well as its tax base. Use Tax simply levels the playing field.
Use Tax is here to stay: Regardless of your opinion, Use Tax is here to stay. Long-forgotten, receipt-filled shoe boxes will continue to provide a treasure-trove of unpaid Use Tax (plus penalty and interest, of course) for the unwary. To reduce your chances of falling into the Use-Tax-Trap take the following steps:
The Bottom Line: Simply recognizing the potential liability and paying Use Tax when due can save thousands in penalties and interest down the road.
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