Avoid Costly Use Tax Traps


 

By: Martha Jenkins

A company’s greatest exposure lies hidden in use tax traps. 

Case Study One:

An employee orders a special laptop brief case over the internet. The invoice comes in with no tax charged. The employee who ordered the brief case has not been trained on sales and use tax liabilities and therefore they think they have SAVED the company money because they did not have to pay tax. When filling out their expense report, they include this purchase for reimbursement. They did not flag accounts payable for a use tax accrual on this purchase. Accounts payable processes the expense reimbursement report without accruing for the use tax liability. When this error is discovered by auditors, it will add to the statistical sampling error rate.

Case Study Two:

Another common use tax trap is purchasing tangible personal property for resale, and then giving it a different use than was originally intended.

To help make the point, let’s say we go to Las Vegas for vacation. While you are there, you do some gambling. While you are gambling, the casino offers you a “free” drink. Since this drink was not sold to you, no tax was collected on the drink. Therefore, the casino must keep track of their comp drinks/meals and place a value on them for their use tax accrual.

The same would hold true for parts that are purchased for resale but are used to repair a customer’s property under warranty, and the warranty was not taxed at the inception of the sale. Since the customer is not paying for the part because it is covered under their warranty agreement, the company will need to accrue a use tax on this part.

Notice:  Alliance Training and Consulting, Inc. provides the contents of this page for general purposes only. You should not substitute this information for individual consultation with a qualified professional in the field. Alliance Training and Consulting, Inc. is not engaged in rendering legal services.

By: Martha Jenkins

© 2015 Alliance Training and Consulting, Inc.