If you haven’t been paying use tax, your business probably owes the state money.
Most business owners think Internet purchases are all that use tax covers, says Chad A. Bice, CPA, principal and director of Tax Services at Rea & Associates, which means many people are unsure or don’t think they have a problem with use tax.
“However, when we review their fixed asset purchases and expenditures, it’s a real eye-opener for them. We show them where problems are commonly found and they come to understand on what purchases use tax is paid. In many instances, they discover that they do in fact owe use tax,” he says.
Fortunately, Ohio has an amnesty period that began on Oct. 1, 2011, and ends on May 1, 2013, which allows businesses owing use tax a once in a lifetime opportunity to avoid interest and penalties on their unpaid tax. For businesses with sufficient tax due, an interest-free payment plan is available for up to seven years.
Smart Business spoke with Bice about the amnesty program and the types of transactions that are likely to incur use tax liability for businesses.
What types of transactions are subject to use tax?
Use tax is owed on the storage, use or consumption of tangible personal property and certain services. When a business or individual buys something and there is no Ohio sales tax on it when there should have been, then you owe use tax. That applies whether it’s purchased through the Internet, mail order or in person. It doesn’t matter if it’s from an Ohio business or an out-of-state business. The Ohio use tax rate is the same as the sales tax rate and the same exemptions that shield some purchases from sales tax also apply to use tax.
Transactions from out-of-state vendors are probably the biggest area where use tax is due. Many out-of-state vendors do not have Ohio sales tax nexus and, therefore, do not have an Ohio vendor’s license. They are under no legal obligation to charge an Ohio business sales tax. Many businesses purchase goods out of state in order to save 6 to 8 percent and many haven’t been paying the use tax.
From an in-state perspective, a lot of use tax is incurred through taxable services — building maintenance and janitorial, electronic data processing and temporary employment services, just to name a few. Many times these are services offered by smaller businesses that don’t know they should be charging you sales tax. If they’re not charging sales tax, it is the consumer’s responsibility to pay use tax.
In-state purchases of taxable tangible personal property are also an exposure item that many businesses overlook. This could range from the local hardware store to the large safety equipment supplier.
What penalties do businesses face if they don’t remit use taxes?
The initial maximum penalty upon audit is 15 percent and interest is between 3 to 4 percent annually, which can really add up. The state is taking an educational approach with the amnesty program. In addition to being interest and penalty free, the program has a seven-year interest-free payment plan available and a limited look-back only to Jan. 1, 2009. If you don’t file for amnesty before the end of the program, the state can go back further in an audit.
How likely is it that the state will come after you if you don’t pay?
The state is aware of more than 300,000 businesses that owe use tax in part because it has linked computer software programs. They know who is registered with the Department of Job and Family Services, who has payroll tax accounts, the businesses that have been filling sales tax returns, who has use tax accounts, etc. It’s very easy for the state to find the businesses that have many of these accounts, yet don’t have a use tax account.
Why not forgo amnesty, register and pay moving forward?
Those companies that have been in business for 10 or 20 years and suddenly register for an account are going to raise some eyebrows. You might as well go back to 2009 now, pay what you owe, and benefit from the waiver of interest and penalties and the favorable payment plan.
Businesses considering amnesty should not register for a use tax account until they’re ready to submit their application.
Chad A. Bice, CPA is a principal, director of Tax Services at Rea & Associates. Reach him at (740) 454-3198 or firstname.lastname@example.org.
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