Consumer use tax: a bane for businesses

Consumer use tax has long taken a back seat to sales tax when it comes to compliance. Many businesses either pay it little mind because they don't understand its complexities, or are completely overwhelmed as to how to tackle compliance. It seems counterintuitive — even risky — to ignore something as significant as tax owed. Businesses trying to manage their consumer use tax liability will tell you: It's not that simple.

Sales tax and consumer use tax have a lot in common. Both are transaction taxes on goods and services. All 45 states that have sales tax also have use tax. And rates for sales tax tend to be the same for use tax in most (but not all) states. Sales tax is the predominant standard, with consumer use tax being the wingman, so to speak. If the seller doesn’t charge sales tax on a taxable sale, then the buyer is obligated to pay use tax. 

Putting this onus on the buyer is risky, as a self-regulated tax is easier to overlook. Fewer than 2% of taxpayers report use tax on their tax returns, according to an April 2015 policy brief put together by the Research Department of Minnesota’s state House of Representatives. States have generally focused their consumer use tax reporting and auditing efforts on businesses, rather than individuals, because the same systems companies use to track their spend are the same systems auditors use to find missed consumer use tax liabilities. Those systems are not geared to tax, and even the most vigilant companies struggle to get it right. This is why mismanagement of consumer use tax is a common compliance error found by state auditors.

Growth or changes in your business that impact sales tax can also impact consumer use tax. This is where the big differences between sales tax and consumer use tax come into play. Consumer use tax liability can change dramatically after invoicing based on how and where products and services are used. 

This can set off all sorts of planned and unplanned triggers, which can include applying the wrong tax to a vendor invoice, internally using or transferring inventory, moving assets between office locations, procuring new equipment, using a service (like software) across multiple locations that was paid for based on only one location, and donating merchandise to a charity or promotional giveaway. This makes assessment for businesses more challenging. Auditors know this and focus on use tax as “low-hanging fruit.” 

Certain industries like manufacturing, construction, and hospitality often face even greater risks of noncompliance because the use tax rules for these businesses are more complex and can vary from state to state. These industries may also see more companies making use of direct pay permits, which means the purchasing company takes on all the responsibility to self-assess consumer use tax.

Lacking supporting tools and services, most companies use spreadsheets to track and report consumer use tax. This is a laborious process with many manual steps. Check invoices carefully. Are tax rates correct? Compare tax on the purchase order to tax on the invoice. Are they the same? Be sure expense reports include sales tax for any taxable transactions. If the sale is exempt, reference a valid resale or exemption certificate. Auditors tend to zero in on invoices that don’t show sales tax and will request proof that you paid tax. Many Accounts Payable departments fail to take the few seconds to actually capture the sales tax paid by vendors when invoices are electronically captured, which makes proving that tax was actually paid much more difficult. All this is essential to prove compliance. It’s also incredibly time-consuming. 

Given these hurdles, it’s not surprising businesses drag their feet, or even worse, simply ignore consumer use tax. However, trying to go unnoticed by state auditors or hoping that penalties for noncompliance won’t be too steep aren’t sound strategies. Failing to properly assess consumer use ranks in the top five for costliest compliance mistakes made by companies. 

Discover life outside spreadsheets with Avalara Consumer Use
Managing tax manually isn’t efficient, which is why so many companies now automate it. Consumer use tax has largely been left out of that equation. After hearing from customers just how urgently they needed this technology, Avalara built it. 

A leading Seattle-based software company was one of the first customers to use Avalara Consumer Use. “Use tax compliance has been a back burner item for a long time,” says the company’s senior tax analyst. “It’s a complicated process. This gives us the capability to finally get into compliance.” 

“The flow and functionality are up to par with our high expectations of Avalara’s products,” she adds. “I would certainly recommend Avalara Consumer Use as a valuable tool to add to your existing compliance suite.”