Use Tax and the Internet: Steering Clear of an Attractive Nuisance
When companies receive a notice of routine audit, very few people worry that they have not paid enough tax on their purchases. Barring the claim of an exemption, most companies pay sales tax as charged by the vendor. Some companies even add tax to invoices and remit it to vendors when tax is not charged. (Never do this. See below.)
Use tax is a tax that purchasers owe the state taxing authority based on where a taxable item or service is first used, stored or otherwise consumed. Use tax is due when the seller does not have nexus with the state in which the purchaser uses the product or service. This issue is very pronounced in the world of internet sales. When a Florida vendor does not charge sales tax on an invoice issued to a Texas customer, assuming the good and/or service is taxable and is shipped and/or first consumed in Texas, that does not mean tax is not due. It means the Texas customer must remit the tax due directly to the state.
No one is exempt from paying tax on a taxable item because it was sold by an out-of-state vendor. If the item is taxable when purchased locally, the purchaser owes use tax when it is procured from an out of state vendor. There is no windfall because the vendor is out of state. The purchaser must report the purchase on the sales tax return, accrue the tax, and remit it.
Never add tax to an invoice and send it to a vendor. When a company does this it does not discharge the tax due on the taxable good or service. The state does not consider tax paid if it does not receive the funds. If tax is added to an invoice by the purchaser, there is no presumption that the state received the funds. The vendor may not have collected the tax because they were not permitted to do so. It is easier and provides the best audit trail when the purchaser remits the funds directly to the state taxing authority.
Many companies do not know about use tax. They assume that they do not owe tax if it was not charged. Do not be fooled. It is the purchaser’s responsibility to know governing tax rules. Accrue and remit the applicable tax, keep records pertaining to accruals, and complete the sales tax return correctly. There is a specific place on the return for taxable purchases. Use it.
Remember: The basic assumption in Texas is that goods are taxable if there is not an exemption. When you purchase goods or services, if the tax is potentially material, learn the taxability to avoid any instance of paying interest and penalty for an honest mistake.
