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Trendwatch: Sales and Use Tax
SWK Technologies, Inc., April 2007 newsletter
As more people and businesses make purchases and sell products online, technology has paved a path to allow companies to increase their geographic market - at a cost of billions of sales and use tax revenue lost by states.
In the not-so-distant past, the U.S. Supreme Court ruled that, in order for a state to require a business to collect and remit sale and use taxes, the business must have a physical presence in that state.
These court cases, along with the Internet, allow hundreds of thousands of companies - that normally did not conduct business in a particular state - to expand their markets and not be required to collect or pay any sales or use taxes to
the state.
So, what are states doing to rectify this situation? Well, one common solution is an attempt to strengthen the use tax compliance function. Many individuals and businesses are not aware that some states impose a corresponding use tax in
addition to a sales tax.
The use tax applies to taxable transactions not subject to sales tax, but where tangible personal property, bought out of the state, is used and/or stored in a state. The use tax is generally imposed at the same rate as the state's sales
tax, and should be remitted to the state by the individual or business making the out-of-state purchase.
Protecting your business from an audit
Over the past several years, there has been a massive increase in state audit activity in an attempt to recoup lost tax revenues. Businesses and individuals should become familiar with how an audit works and what type of records and documentation should be retained in the event of an audit. Proper
records and documentation could potentially save your company thousands of dollars in taxes and penalties, while decreasing the amount spent on defending an audit.
Generally, the audit process begins with a notification letter to the individual or business. The state will ask to see the company's books and records, documentation of all sales, invoices, expenditures, and any asset purchases made over
the last few years.
Most state auditors will not give you the benefit of the doubt for any missing documentation or gray areas in the tax law. Be sure your company is able to explain and document why sales or use tax was not charged on non-taxable revenue.
Further, be ready to explain why a sales or use tax was not paid on the company's non-taxable purchases.
It is important for a company to keep the proper exemption and other supporting documentation to prove a sale was not subject to tax. Additionally, it is just as important to implement a use tax reporting system and understand why
non-taxable purchases are exempt.
Numerous exemptions may apply to your business, including items for resale, packaging materials, and equipment used in manufacturing or research & development. Such exemptions can also include the leasing of such equipment. If you are
purchasing these types of equipment, becoming familiar with the exemptions that may apply can save you thousands of dollars.
Do not let the auditor charge your company for exempt items. Talk to your sales and use tax advisor; some proactive planning now could potentially save you hundreds of thousands of dollars, depending on the size of your business.
This article was co-authored by Danielle Desplaines, Esq. (ddesplaines@oatax.com) and Mark L. Stone, CPA, MST (mstone@oatax.com) of Olivier & Associates, a specialized sales and use tax consulting firm that defends clients against
aggressive auditors and assists in legally minimizing a business' sales and use tax liabilities.
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