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Should you be paying consumer use tax?

Dec 01, 2022

The holidays are here, and the purchases are plentiful.

This is a good reminder to review your invoices for sales tax. If the sales tax amount is missing, you might be liable for consumer use tax.

What is consumer use tax?

Consumer use tax is often overlooked and underreported due to various reasons, such as limited knowledge and inadequate internal controls. It’s defined as a tax the purchaser or end consumer should remit to the taxing jurisdiction when a seller/vendor does not collect sales tax on a taxable product. This also includes remitting any partial tax that was not fully collected by the seller due to an accounting error.

The onus is on the buyer. Consumer use tax should not be confused with seller use, vendor use or retailer use, as these taxes are similar in nature to sales tax and are collected and remitted by the seller.

Common misconceptions around consumer use tax

There are a couple of common misconceptions around consumer use tax that should be clarified to help your organization better understand the tax and your responsibilities.

First, if the vendor does not apply sales tax on the invoice, then that is their mistake. The vendor should have charged sales tax if it was due.

There are many reasons why a vendor may not have applied sales tax to an invoice, including:

  • The vendor may not be registered to collect and remit sales tax for the taxing jurisdiction. Therefore, the seller should not collect sales tax if they are not able to report it, as this could lead to serious penalties and legal issues for the vendor.
  • The vendor may also not fully understand the taxability rules for its products/services in other taxing jurisdictions. This misunderstanding could result in their invoicing system not being configured correctly to apply the correct sales tax.
  • The vendor may be a foreign company with no physical U.S. nexus. However, based on the states’ economic nexus statutes, there are no exceptions provided to foreign entities, and they should adhere to the same obligations as domestic entities. Enforcement of foreign entities can be difficult.

Regardless of the reason a vendor is not collecting tax, under most state use tax provisions, if the seller is not collecting the tax, then the buyer is obligated to report use tax on taxable goods/services.

Another misconception is that your organization may be considered a wholesaler and by definition is exempt from collecting and reporting sales tax, and therefore you believe you do not have to pay consumer use tax either.

Many manufacturers or distributors know that if their customers are resellers, no tax is required to be collected provided a valid resale or exemption certificate is received in good faith from the reseller.

However, if a wholesaler makes taxable purchases for its business operation, the company is considered the end user and is responsible to remit use tax to the extent not charged by the seller for the taxes.

Companies should be mindful that if a vendor does not collect the sales tax on taxable purchases, the company has an obligation to identify which of its purchases are taxable and remit use tax to the jurisdiction where the product or service is first used.

Keep in mind, there are other situations that would exempt a company from paying sales tax to a vendor and/or self-assessing consumer use tax on its taxable purchases. These are typically granted to governmental agencies, educational organizations, nonprofit charities, religious organizations, etc. You would need to contact your state’s sales tax division to see if your organization qualifies. These organizations must have a valid sales and use tax exemption permit by the taxing jurisdiction that should be readily available to present to vendors.

Tips to help you survive an audit

The lack of reporting consumer use tax is not isolated to specific companies of a certain size or industry. Nearly all companies make operating purchases resulting in a potential tax exposure.

For the companies lucky enough to avoid a sales and use tax audit, one of the major areas of review are the company’s purchases. Auditors will typically pull the vendor’s invoices and review the sales tax collected on taxable purchases. If sales tax was not collected, it’s the company’s burden to prove that the use tax was accrued and paid to the taxing jurisdiction.

It’s important to remember that the end consumer has the ultimate responsibility for reporting the tax if the vendor does not collect it on taxable products. Your company should not overlook its consumer use tax obligation and should implement a process to find such potential tax exposure.

Three tips:

  • Review vendor invoices to see whether sales tax was applied, and remember to validate the tax rate for accuracy.
  • Review current vendor contracts regarding the responsibility of tax, as the contract may specifically state that your company is responsible for assessing and reporting use tax.
  • If sales tax is not assessed on the vendor invoice, determine whether the items purchased are taxable. Do not assume they are nontaxable, as this excuse will not save you from the tax liability if audited.

Wipfli can help

Do you have consumer use tax responsibilities but aren’t quite sure how to get a handle on it? Wipfli’s tax specialists can help. Learn more.

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Author(s)

Keela Ross
SALT Director
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