Could anything be more useless than a use tax?

Consumers bear the brunt of use taxes, of course — at least in theory — because these levies are designed to function as states’ fall-back position for regular old sales taxes when those are not collected for one reason or another (usually because the seller is out-of-state and is not required to collect sales tax in the purchaser’s state). But good luck in finding one consumer in 50 who has even heard of use taxes, let alone understands them. Let alone actually pays them.

Companies get their fair share of use tax headaches, too, because in many situations they are, effectively, consumers.

Let’s say your firm is based in a state that imposes a sales and use tax, like California. You buy some office supplies by mail order or via the Internet from a company in Indiana that has no nexus with California and so is not required to collect sales tax there. When the invoice comes in, it doesn’t show any sales tax, but you still have to self-assess the equivalent amount of use tax and remit it to California. Fun!

OK, it’s not rocket science, but it does bring an extra level of complexity to transaction tax planning and compliance, and I always grab anything I come across that promises to throw new light on the wacky world of use taxes. One resource that’s definitely worth taking a look at is a new white paper from business information provider CCH, a Wolters Kluwer business, which points out that “consumer use tax associated with untaxed purchases often represents the greatest portion of a transactional audit assessment for many businesses.”

It’s not that companies are unaware of the obligation; it’s just that use tax is not usually a priority for senior decision-makers because it doesn’t directly affect customers or revenue, says CCH. Decisions around use tax compliance are often left to the accounts payable folks, who generally lack the necessary tax expertise.

The paper includes a helpful list of transactions that require use tax. Here’s a sample:

• Fixed asset purchases that flow through a company’s accounts payable system;

• Services or other purchases not viewed as tangible personal property that flow through a company’s accounts payable system;

• Internal consumption items that were originally purchased for the purpose of becoming part of the finished product in the manufacturing process. ###