Use Tax Notice and Reporting Requirements

What is Use Tax? Use Tax is a tax imposed on the use of a taxable item or service in a state when the sales tax has not been collected by the seller. Example: A company located in Texas ships a computer to a customer located in Tennessee. The company does not collect sales tax from the customer on this transaction because the company does not have sales tax nexus in Tennessee. The customer uses the computer in Tennessee. The customer owes Tennessee use tax on this transaction because the computer is purchased from a seller located outside of Tennessee, sales tax was not paid on the transaction, and the computer is used in Tennessee.

Companies making sales to customers in other states, generally referred to as remote sellers, may have use tax notice and reporting requirements in some states where the remote seller is not obligated to collect sales tax.

The use tax reporting requirement that has been recently implemented by several states requires remote sellers to notify their customers that they may owe use tax on their purchases. The majority of states have two notification requirements. First, the remote seller is to provide or post a transactional notice informing the in-state customer that sales or use tax is due on purchases made from the remote seller. Second, the remote seller is to provide customers with an annual purchase summary statement displaying the customer’s purchases for the calendar year.

In addition to the notification requirements discussed above, remote sellers are also required to provide annual customer information reports to state agencies. The majority of states require the annual customer information reports to contain the customer names and total amounts paid to the remote seller during the previous calendar year.

The following states have adopted some sort of use tax notification and reporting obligation for remote sellers:  Alabama, Colorado, Georgia, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Vermont and Washington. It is anticipated that more states will continue to follow. Each of these states vary with regard to their use tax notification and reporting rules. For example, one state may require transactional notices only, while another state may require transactional notices, annual purchase summary statements and annual customer information reports. In addition, in many of these states, the use tax notification and reporting obligation is required only if the remote seller meets a specific threshold. For example, Colorado’s use tax notification and reporting law applies to remote sellers who make more than $100,000 per year in sales in Colorado and do not collect Colorado sales tax.

The responsibility of complying with out of state sales and use tax remittance or requirements is becoming increasingly complex. If your business sells out of state, you need to be aware of the rules and regulations in place for the states in which you are selling, as most states carry significant monetary penalties for noncompliance.

For questions about these law changes or other state and local tax matters, please contact us. 

© 2018