Save Thousands of Dollars by Properly Calculating Consumer Use Tax

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

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AUTHOR

Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

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