Avoiding sales and use tax traps.

Businesses that consider sales and use tax an unimportant miscellaneous tax could be making a mistake. Many states have been aggressively auditing taxpayers for a number of reasons:

* Individual state financial positions are declining, especially in light of Federal cutbacks.

* The nature of business today. Most business is not conducted in any given neighborhood, city or even state. Next day mail has the power to put tangible personal property in a buyer's hands 2,000 miles away within 15 hours.

* Rising state and local tax rates (especially sales taxes). Taxpayers do not object as much to a quarter of a point increase in the sales tax rates as they would to a quarter of a point income tax increase. It is not uncommon to find sales tax rates in excess of 7%.

Complying with these taxes, and protecting a company from a potentially huge sales and use tax liability as a result of an audit, may not be as difficult as imagined. In fact, it can probably be fully accomplished with the use of support staff.

Sales tax

Sales tax in most states is imposed on the sale of tangible personal property to a buyer that is considered an end user. The buyer usually bears the economic burden of the tax, but the seller is ultimately responsible for collection of the tax (as an agent for the state). The person responsible for billing should verify that all sales to end users (buyers) of tangible personal property within the state have sales tax billed on the invoice, unless an exemption certificate or affidavit is obtained at the time of the actual sale. It is important to obtain the proper documentation prior to the sale, since this may be very difficult later (a customer may be out of business or may have moved with no forwarding address). In fact, most states use this language in their statutes. The most common types of exemption are resale, sales to Federal, state and local governments, manufacturing equipment, farm equipment, religious and educational institutions, sales in enterprise zones and rolling stock.

Use tax

The use tax is the complement to the sales tax. A use tax is imposed on the end user. Commonly, a use tax is due when a purchaser buys tangible personal property from out of state or by mail order, and the seller does not collect sales tax. A use tax should also be self-assessed in the situation in which an in-state seller erroneously omits the collection of sales tax. The common exceptions from use tax are the same as for sales tax, in addition to a credit allowed in some states for use taxes properly paid to another state.

The person responsible for the payables function should keep a file of all consumable supplies and fixed asset purchases. These files then can be used as backup for a use tax filing.

Some important points to be aware of are:

* Take advantage of state amnesty programs; usually, any taxes owed can be paid without penalty (but including interest).

* The receipt of an exemption certificate generally relieves the seller from liability only if it is accepted in good faith.

* There is no statute of limitations if a properly completed sales/use tax return is not filed. Thus, if a taxpayer is doing business in a foreign state for a 10-year period in which sales tax returns should have been filed, the state can assess liability for the full 10-year period.

* If an in-state seller does not charge sales tax, both the buyer and the seller can be held liable for the tax.

In conclusion, the short-term cost to comply with sales and use tax laws may far outweigh the potential cost of a large audit assessment of tax, interest and penalty.

From Kenneth Plante, Olympia Fields, Ill.