Untaxed purchases are a common target when state sales tax auditors knock at the door
By Phil Schlesinger, Product Manager, Sales and Use Tax
Most companies know the taxability of their own products or services, and do their best to comply with sales tax rules where they do business. That’s not always the case when it comes to the purchase side of a company’s operations — and that can often lead to costly use tax assessments including penalties and interest, and/or overpayment of tax to vendors that goes unnoticed.
Tax compliance can fall short of the mark because:
Purchase transactions typically flow through accounts payable. This makes sense from a workflow standpoint, but when transactions are not reviewed by qualified tax professionals, the risk of underpayment or overpayment increases.
Internal “back office” transactions may not get the attention they deserve or are ignored altogether by decision makers. That can come back to haunt you in an audit.
Purchases may take place outside the accounts payable process — for example, using purchasing cards — where all you get is a statement with no indication if tax was paid or not.
Many audit horror stories illustrate how companies can get in trouble. One such example happened in the state of Ohio where auditors decided that, based on their interpretation of Ohio’s use-based exemptions, certain equipment was too far removed from the manufacturing process to qualify as exempt. That cost close to six figures in tax, penalties and interest because the use tax was not self-assessed.
Another example took place with the state of Tennessee. The applicable company printed thousands of catalogs and gave them away free of charge — which subjected the company, as the donor, to use tax that should have been self-assessed and paid to the state. Relative to the distribution of the catalogs, management of the company chose not to self-assess the use tax and when the state auditors came in, that decision cost the company about $200,000.
An automated consumer use tax system is one solution to help ensure compliance and the correct self-assessment of tax. You need to choose a viable software solution that addresses “what” is purchased, “how” the purchase item is used and where usage takes place. This will minimize audit risk, and help prevent overpayment of tax while saving time and effort.
This story is from the CCH e-newsletter Figures, written specifically for corporate tax professionals. Figures offers tips, tricks and ideas about how to increase your organization’s productivity and efficiency. Every issue also features insights with a corporate tax professional