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How to identify the use tax?

Is there a quicker & easier way to identify the use tax owed, besides doing it manually?

Answers

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

If the invoice does not specifically identify tax being collected by the vendor, and it is for a tangible item, then use tax is due. These usually occur on purchases made online, or out of state purchases being brought/shipped into the state.

There are other laws depending on the state. The quicker and easier way though, is to determine whether tax was collected by the vendor. I can post more on a few other specifics if you wish.

Michael Le
Title: Project Analyst
Company: Hospitality Ventures Management Group, L..
(Project Analyst, Hospitality Ventures Management Group, LLC) |

Use tax will always be manual - it is the process of identifying and paying the tax "yourself".

Quicken the process by identifying and listing the taxable items for your jurisdiction (i.e. town, county, state) and have these items listed and easily accesible.

All jurisdictions have different rules that can vary city by city within the same state.

Keep in mind these things when identifying Use Tax:
-Freight can be taxable (Illinois & New Jersey)
-Installation can be taxable (Illinois & New Jersey)
-Anything that becomes a Depreciable Asset (Hilton Head, South Carolina)
-Some states give a Credit for taxes already paid
i.e. 5% tax credit for tax paid to Maine vendor, but you owe 7% NJ Use Tax (submit the 2% to NJ)

Anonymous
(VP - FInancial Planning and Analysis) |

The effort that goes into the accoutning for sales and use tax is one of the major hidden costs in business. There has to be an easier way.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Correct, and I agree.

There is an easier way. Only deal with vendors that charge the applicable state and local sales taxes. Do not purchase items online, or out of state. If companies want an easier way, they should support local businesses. The construction company I work for purchases materials from as many local dealers where projects are because of the cost involved. It is counterintuitive to pay 10% for a product with no tax included, just to turn around and have to calculate use tax of 6% (as a for instance), and pay a wage to the person filing the report.

Purchase locally from retailers if you want the easy way. Most local wholesalers are not required to charge tax. Therefore wholesale purchases will not always help avoid paying use tax.

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

It is manual, but we have the calculations taken care of at the AP entry level. Items are identified from historical data (which suppliers don't collect, and what items are taxable). I have dealt with this two ways in the past. In one company, we coded all purchases needing the use tax into a gl code with a suffix to help identify the item for easier calculation at month end. In my current company, we add two lines to each invoice - one line is a debit for s/u tax, and the other is to the accrued s/u liability account. At month-end, I have most of my schedule prepared and simply add the rate and submit the payment.

Both of the above scenarios require staff who understand enough about sales tax to handle this. I haven't had a problem with overlooked items at this point.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

To follow up to Sara's point, I have my AP person keep the invoice in the sales tax folder and add the total to the monthly sales tax payment. An easy way for you to track might be creating a spreadsheet and have someone enter the invoices that don't have the sales tax collected with a formula to calculate what the use tax will be for the next month, at least then there are no surprises at payment time. We don't order a lot so mine is never more than a few hundred.

Tim Kane
Title: Principal
Company: Tim Kane, CPA
(Principal, Tim Kane, CPA) |

The best way is to have the use tax entered at the time the invoice is entered. If your software has user defined fields you can use one of them. If not look to see if there are any fields that are not being used. Then when an invoice that needs to have use taxes paid is entered put the taxing jurisdiction into that field. Have a report set up to pull a list of invoices with an entry in that field sorted by the tax jurisdiction (make sure they pull by the GL date and not the invoice date so late entered invoices are included). Then you have the total purchases subject to use tax to put in your return and can just multiply that by the tax rate. This solution works if you have multiple jurisdictions.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

I was pondering the question (and it's a really excellent question). In the U.S., it used to be the norm that most sellers added sales tax for non-capital purchases. With on-line purchasing, that's changed.

It occurred to me that xero.com, the accounting package I use for a couple of my start-up companies, actually *does* automate the process of computing and recording use tax. Xero.com is based in New Zealand, one of the many places in the world captive to a value added tax regimen. Under a VA tax regimen, it's the responsibility of the purchaser to record the tax paid as well as the tax collected on every item that goes through the accounting system.

If your G/L system is built for US GAAP, chances are the system assumes the US approach to sales tax. If you're lucky enough to have a system initially designed for VA tax reporting and then modified to accommodate US GAAP, there is likely a way to automate. Xero.com is one such system and might be appropriate if your company is relatively small. MS Dynamics has NAV for the US market and a similar product, AX, for the rest of the world. There have been plans for convergence of the platforms but I don't know if that's still in the MS product plan. If AX is available in the US (and is GAAP compliant), it likely offers a means of automating the calculation, recording, and reporting of use tax.

If your goal is to maintain your current G/L while adding a tool to facilitate automation, I expect you'll be disappointed. The closest you can come is to ensure your vouchering process includes a step allowing the recording of use tax on each purchase.

Hope this helps.

Stacey Ames
Title: Marketing Manager, ERP
Company: Avalara
(Marketing Manager, ERP, Avalara) |

Avalara offers a tool that automatically scans transactions housed within your ERP/Accounting system based on user determined criteria, assesses use tax for the transactions, and provides the user a cloud-based interface to review, edit, and confirm the final use tax accrual. Please www.avalara.com for more information.

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