Over the last few years, we have noticed an increase in sales/use tax audits focused on screening various businesses that are not accustomed to facing such audits. For example, Connecticut, New Jersey, and New York have targeted industries that include law firms, medical practices, and architecture and engineering (“A&E”) firms.
Historically, A&E shops have rarely concerned themselves with sales tax, as their core service offerings are generally exempt from sales tax. However, with the proliferation of e-commerce, firms can now order most if not all of their equipment, software, furnishings, and supplies online without paying sales tax to the seller (assuming the seller has no responsibility to collect tax in the “ship-to” state). When taxable products and services are purchased and sales tax is not collected by the seller, most states require the buyer to pay “use tax” on the purchases. Use tax is a tax imposed on the use of taxable items and services when sales tax has not been paid at the time of initial purchase. In most states, the use tax rate and sales tax rate are the same.
A&E firms are required to pay sales or use tax when they make purchases of non-exempt equipment, software, furniture and other products which will be used or consumed in providing services. As previously noted, many organizations make significant purchases via the internet and by credit card. If the seller of the supplies does not collect the applicable sales tax, the purchaser should be responsible for remitting the appropriate use tax directly to the state where the purchases are used. As with every sales and use tax audit, auditors request to review credit card statements and underlying receipts to determine if sales tax was properly paid on purchases. A lack of supporting documentation on this front can be very damaging, as an auditor will generally assume that tax was not paid if a receipt or invoice is not provided.
The following are four general guidelines an A&E firm can follow to help keep the practice compliant with its use tax responsibilities. Please note, since every practice is different, the following is not intended to be specific advice but rather general guidelines.
- Register for sales and use tax purposes with the appropriate state’s Department of Revenue and file the required sales and use tax returns. This starts the clock on the statute of limitations and thereby should keep a state from assessing tax beyond the standard statute.
- Review, on a monthly basis, all significant purchases to determine if sales tax was properly paid on taxable purchases. If sales tax was not paid, use tax should be remitted directly to the state in which the goods/services were used.
- Perform technical research as necessary to determine the taxability of items purchased. Note the applicability of tax may differ from state to state.
- Maintain all purchase receipts and invoices, including purchases made through credit cards.
To make this issue clearer, here are a few examples of when a use tax payment may be required:
Example 1: Your firm has decided to remodel its 30-seat office in New Haven, Connecticut. You identify a vendor online that will give you a great price on desks and chairs. The seller does not collect Connecticut sales tax. Your firm will owe use tax on the amount you paid for the furnishings, including freight charges.
Example 2: While in Florida attending an industry trade show, you contract to purchase software that will be delivered on a disk to your New Jersey office. The seller does not collect New Jersey sales tax. Your businesses will be liable for New Jersey use tax on the purchase price of the equipment, including any charge for shipping and handling.
Example 3: Your New York City-based architectural firm intends to expand into a new market. You contract with an out-of-state data seller to provide you with certain information related to your target market. The report and data are accessed electronically from your New York office. The service is a taxable information service for New York sales/use tax purposes. No New York sales tax is collected by the data seller. You owe New York use tax on the amount you paid for the report and data.
State auditors are aware of these problems and are taking focused actions to call out A&E practices that are not in compliance with their sales and use tax responsibilities. It is critical to put appropriate procedures in place to address this matter. Don’t be left wondering why your practice is getting hit with a sales/use tax audit. Take action. Contact your Citrin Cooperman advisor to discuss how to take measures to mitigate this issue.