Be Aware of Use Tax: The Stealth Tax

When businesses are audited by the WV State Tax Department the result is often a very expensive vocabulary lesson that bold-stamps the term “use tax” into the owner’s lexicon. Most business owners are very familiar with the proper collection and remittance of sales tax. Sales tax’s cohort, use tax, however, often remains unnoticed until an auditor tallies up a jaw-dropping deficiency bill. In today’s article, we will discuss the basics of use tax as it applies to your business. Our goal is to help spark “use tax” recognition when you make an internet or out-of-state purchase, not a few years later when an auditor asks to see receipts for all your major purchases.

According to the WV Department of Tax and Revenue “use tax is tax a 6% tax on the use of tangible personal property or services in West Virginia where sales tax has not been paid.” This means that if you or your business purchases an item from someone located outside West Virginia and bring it into West Virginia (where it used or consumed), that purchase is subject to the same sales tax rules as any other West Virginia purchase. Under such circumstances the tax is called use tax, not sales tax, and it is the buyer’s responsibility to pay, not the sellers.
The buyer must report and pay use tax but gets a credit for any sale tax paid to the state where the items were originally purchased.

Here are some common situations that get taxpayers into trouble:

Your business buys $10,000 worth of computer equipment for its West Virginia office from an online computer vendor. The vendor does not charge sales tax. Your business must remit the $600 (10,000 times 6%) in use tax to the West Virginia department of tax and revenue.

Your Business purchases a $30,000 piece of heavy equipment from an individual (or at an auction) in another state and you bring it into West Virginia for use in your construction business. You do not pay sales tax on the purchase. You must remit $1,800 (30,000 times 6%) in use tax to WV.

You hire a doctor from another state who comes into West Virginia to conduct physicals on your employees. Although the services are performed in West Virginia they are exempt from sales tax as professional services and, therefore, are not taxable under use tax.

As a final example, consider this common scenario: Your office manager lives in Virginia. She routinely purchases office supplies for your West Virginia office in Virginia. Over the course of the year, she purchases $10,000 of supplies using your business credit card. These purchases are subject to use tax but you get a credit for taxes paid to Virginia. Since Virginia has a tax rate of 5% (4% state and 1% local) you will get a credit for the $500 sales tax ($10,000 times 5%) paid to Virginia. However, because West Virginia has a tax rate f 6% you will still owe $100 ($10,000 * 6% = $600, minus $500 = $100) to West Virginia on these purchases.

Many would argue that the complexity and reporting requirements of use tax place an undue burden on taxpayers. Most business owners simply don’t have time to review every purchase for potential use tax liability and they don’t have the money to pay their accountant to analyze every receipt. On the other hand, the state might argue that noncompliance results in millions of lost tax dollars, a situation that has gotten worse with the growth of internet purchases. They might also argue that out-of-state sellers who do not follow to same rules have an unfair advantage over in-state sellers of the same products. This unfair advantage drains money from both the local economy as well as its tax base. Use tax simply levels the playing field.
Regardless of your opinion, Use Tax is here to stay. Long-forgotten, receipt-filled shoe boxes will continue to provide a treasure-trove of unpaid Use Tax (plus penalty and interest, of course) for the unwary.

To reduce your chances of falling into the Use-Tax-Trap take the following steps:

First, make sure your internet and out-of-state suppliers charge sales tax on all your purchases.
Second, remember infrequent out-of-state purchases of high-priced equipment are major source of use tax liability. And finally, make a mental note of the term “use tax.” Simply recognizing potential liability and paying use tax when it’s due can save thousands in penalties and interest down the road.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.