How to take advantage of the state’s amnesty period to pay the use tax you owe

Mary Jo Dolson, Director in Tax, SS&G

If you buy an item online or out of state and you don’t pay sales tax on it, you may owe use tax to the state of Ohio.

However, many businesses and individuals only discover this when they are audited by the state, resulting not only in the payment of taxes going back seven years — the state’s prior audit policy for unregistered taxpayers — but also in interest and penalties, says Mary Jo Dolson, CPA, director in tax at SS&G.

“There are numerous taxpayers located inside and outside of Ohio who are not paying Ohio use tax,” says Dolson. “That is potentially costing the state of Ohio a significant amount of tax revenue. Other states are also facing budget shortfalls and becoming more aggressive in the area of use tax.”

To begin collecting that money and get taxpayers registered for use tax, the state is offering an amnesty program for taxpayers who haven’t previously registered for use tax.

Smart Business spoke with Dolson about how to register for the program that began Oct. 1, 2011, and continues until May 1, 2013, and why it’s smart to come forward before the state ferrets you out.

Why is the state offering this program?

It is trying to get people to come forward and make it as advantageous as possible for taxpayers to pay the back taxes and register. Previously, if the state audited you and you weren’t registered for the use tax, it would go back seven years and charge interest and penalties, in addition to the back taxes.

Then, in January 2011, it started an education program and offered taxpayers a look-back period of only four years and the abatement of all penalties. Finally, with the passage of the state budget bill in June, the current amnesty program was adopted.

How does the amnesty program work?

You only have to go back to Jan. 1, 2009, and determine potential Ohio use tax liability. Taxpayers are then required to pay all tax due and remit to the state with the completed amnesty application. The state has eliminated all interest and penalties due on that liability.

You have to qualify for amnesty. If you were already registered for the use tax prior to June 1, or if you’ve received an assessment for use tax in the past, you do not qualify. However, in the latter situation, the taxpayer will probably qualify for a voluntary disclosure, making him or her possibly liable for use tax back to Jan. 1, 2008. Although penalties would be waived, you still have to pay interest.

How do you apply for amnesty?

Go to the Ohio Business Gateway, register and complete the application. But first, look at your purchases to determine your potential exposure. Payment is due at the time the application is submitted unless you enter into a payment plan. Taxpayers will have to complete and upload an Excel file of the items being reported under amnesty.  Do not complete the amnesty application prior to calculating the amount of use tax due.

Consult with your accountant while reviewing invoices concerning any grey areas to make sure you are only paying use tax on the items that are truly taxable. Or, have your accountant review the spreadsheet before remitting to the state.

Will the process create a lot of work for businesses that haven’t previously filed?

Managing what you owe on use tax can be time-consuming. However, once you establish your liability, your adviser can give you policies and procedures to follow to determine your liability on a monthly, quarterly and yearly basis so that you are not spending days coming up with use tax liability in the future.

Having such systems in place will allow you to run reports quickly and get to the bottom line of what you owe. There will be the pain and anguish of going back to your 2009 purchases, but then you will have systems in place to make it much simpler going forward.

If a lot of money is owed in back taxes, does it all have to be paid at once?

No. The state is offering a payment plan if the use tax liability is more than $1,000, but you have to make a minimum payment of $1,000 each month. Payments can stretch out over as long as 84 months.

However, if a business enters into a payment plan, two people in the company must agree to be liable for the use tax liability due under amnesty should the company stop paying the debt. One must be an officer of the company, and each person must accept personal liability for the entire amount of the debt.

Is it OK to wait until closer to the end of the amnesty period to apply?

In theory, you can wait, but there is a chance that if you do, the state may decide to audit your business in the meantime. If it does, the auditors will still only go back to Jan. 1, 2009, but while there may be a break on penalties, you still may have to pay interest.

What would you say to those who think they can continue to get away with not paying use tax?

There’s no guarantee that at the end of this amnesty period on May 1, 2013, that the state is not going to start doing seven-year audits again for unregistered taxpayers. In 2011 alone the state has changed its approach for unregistered taxpayers several times. When other states have offered amnesty in the past, once that amnesty period has expired, the states have imposed significant penalties to those who did not take advantage of the amnesty.  The savings of interest and penalties alone could be significant for some taxpayers.

Mary Jo Dolson, CPA, is a director in tax at SS&G. Reach her at (330) 668-9696 or [email protected]