Self-Assessment Of Consumer Use Tax - CCH

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Self-Assessmentof Consumer Use TaxOverlooking Consumer Use Taxcould end up costing you in an audit.Are you prepared?

Self-Assessment ofConsumer Use TaxIntroductionDefining Consumer Use TaxFor most companies, the imposition of salestax is a normal part of business operations.However, consumer use tax is oftenoverlooked, leading to costly transactionalaudit penalties and interest, or unnecessaryoverpayments. Consumer use tax associatedwith untaxed purchases often representsthe greatest portion of a transactionalaudit assessment for many businesses.Consequently, allocating resources to ensureaccurate consumer use tax reporting is notonly advantageous in terms of trying tofollow state and local use tax law, but it isalso wise from a management and financialperspective as well.Generally speaking, when a buyer and sellerare located in the same state in terms ofship-to and ship-from locations, a salestax transaction takes place. The seller hasthe legal obligation to collect the salestax due if the product or service is subjectto tax, unless valid exemption certificatedocumentation has been provided in lieu ofpaying the tax.Over time, most companies become fairlyknowledgeable with respect to the taxabilityrules of their own products and services,and today’s fairly robust sales tax softwaretechnology increases the level of sales taxcompliance even more. On the purchase sideof a transaction, however, the same level oftaxability knowledge may not exist. Purchasetransactions that flow through an accountspayable system may not only be morecomplex from an implementation standpoint,but they are often given less priority by therelevant decision makers because they don’tdirectly impact customers or revenue. These“internal,” back-office transactions may notget the attention that is needed or they aresometimes ignored altogether.Ironically, for businesses that do attemptto address consumer use tax reporting, theresponsibility of deciding which purchasetransactions are subject to use tax andwhich ones are not is often shouldered bythe accounts payable department ratherthan by qualified tax professionals. Thisapproach may make sense from a workflowperspective, but it is problematic becauseaccounts payable personnel are usually nottax experts; consequently, the risk of eitherunder or over self-assessing consumer usetax is high.Because a manual process is both laborintensive and error-prone, an automatedconsumer use tax reporting system isactually more cost-effective than it mayinitially appear. This whitepaper examinesself-assessment and reporting of consumeruse tax and offers practical solutions foreconomically automating the process.In the event that a buyer and seller arelocated in different states — or in somecases in different localities in the same state— and delivery of the product takes placein the buyer’s state (or locality within thesame state), the transaction is generallyviewed as a use tax transaction, in full orin part. The seller may or may not have alegal obligation to collect the use tax due,depending on their presence in the ship-tostate and/or locality.If the seller has sufficient nexus asdetermined by individual state and localstatutes, they are required to registerand collect any seller’s (also identifiedas vendor’s or retailer’s) use tax that isapplicable on the transaction, providingno exemption certificate documentationhad been provided to the seller in lieu ofpaying the tax. However, the buyer may beresponsible for self-assessing, reporting andremitting consumer use tax if:nnnnThe seller has no legal obligation tocollect the use tax.The seller is not authorized to voluntarilycollect use tax as a convenience to theircustomers in non-nexus statesand/or localities.The seller has sufficient nexus but fails tomeet their obligation to collect the salesor use tax for any reason.The seller was legally released fromthe obligation of collecting the tax duewhen the buyer provided valid exemptiondocumentation in lieu of paying the tax.

The bottom line with respectto a “taxable” transactionis that if a sales tax is notapplicable or has not beenimposed, then a use tax will bedue, and if the seller does notcollect it, the purchaser willhave the responsibility to reportand remit it.The Buyer’s ObligationWhen a seller has not included tax ontheir invoice or other billing statement it isgenerally because of one of three reasons:Consumer Use Tax Automation —Review, Calculation and AccrualAutomating the self-assessment of consumeruse tax can be a difficult task from a systemicstandpoint because of implementationn They have determined that the transactioncomplexities as well as the disjointed natureis non-taxable based on state andof extracting accounts payable or otherlocal statute.purchasing data and then running it througha tax engine for use tax consideration. Inn Exemption certificate documentation hastheory, any purchase transactions wherebeen provided in lieu of paying the tax.sales or use tax was not calculated andn The seller is not authorized to collectimposed by the seller should be viewed asthe tax that is presumably due ona candidate for consumer use tax review.the transaction.In order for a system to be viewed as aviable consumer use tax solution, it shouldRegardless of the reason, the buyer may haveto be able to address all the what’s, how’san obligation to self-assess the use tax andand when’s that are required for the selfremit it directly to the state and/or localassessment of consumer use tax.tax authority based on whether or not theproduct or service is subject to tax.However, self-assessment is often a laborintensive process, and instead of delegatingthis task to qualified tax professionals,some companies rely on accounts payablepersonnel to make taxability decisionsrelated to untaxed purchases. Unfortunately,this approach runs the risk of under selfassessing, resulting in penalties and interestduring an audit, or over self-assessing,which can cost a company a great deal ofmoney that is unlikely to be discovered andrecovered before the statute of limitationsruns out. To lower the risk of penalties andinterest, or potential overpayment, anautomated consumer use tax system canbe valuable.

Which Transactions Require Use Tax?The following types of transactions will generally require a consumer use tax reviewwhen no tax was imposed or only a partial tax was imposed by a seller on the sale oftheir products or services:nFixed asset purchases that flow through a company’s accounts payable system.nExpense item purchases that flow through a company’s accounts payable system.nnnnnnServices or other purchases not viewed as tangible personal property that flowthrough a company’s accounts payable system.Intercompany / Interstate transfer of fixed assets where sales or use tax has notbeen previously paid, or has been previously paid but at a lower tax rate than thestate and locality of final consumption.At a minimum, a consumer use tax systemshould be capable of accomplishing thefollowing tasks:nnnnUntaxed or under-taxed supply items that have been purchased in bulk andshipped to a central corporate location or regional center and then subsequentlydisbursed to various company locations throughout the country or region.Other purchases made by a company that do not flow through the normalaccounts payable process where sales or use tax was not imposed by the vendor onthe transaction.Determine if the sales or use tax duewas included on an invoice and paid tothe vendor.Generate the needed use tax calculationbased on an accurate use tax rate.Handle use tax accruals for all untaxedpurchase transactions that are determinedto be subject to consumer use tax in one ofthe following ways:nnInternal consumption items that were originally purchased for the purpose ofbecoming part of a finished product in the manufacturing process, or an itempurchased for resale, where no tax was paid upon the original purchase but wassubsequently taken out of inventory and used internally.Product samples or other TTP (tangible personal property?) that are given awayfree of charge where sales or use tax was not previously paid on the purchase of theitems. In most cases, the taxable basis is determined on the cost rather than theretail selling price.Ascertain whether consumer use tax is dueon a purchase transaction based on predetermined taxability rules built into thelogic of the system.nGenerate the use tax accrualsFeed the needed use tax information toan Accounts Payable or GL system foruse tax accrual generationGenerate a report identifying therequired use tax accrualsDepending on the needs of a company, theaccounts payable and/or purchasing systemcapabilities, and management’s tolerance tounder- or over-payment risk, a consumer usetax solution may need to be able to performone or both of the following additional tasks:nnDetermine if the seller imposed taxcorrectly by comparing all taxed purchasetransactions to taxability rules. The systemthen needs to generate an electronic feedor hardcopy report for short payment,credit or refund request purposes.Determine if the seller charged the correcttax rates by comparing all taxed purchasetransactions to system and custom taxrate tables. If the tax was under-charged,the system needs to generate the usetax accrual to cover the difference, orif the vendor over-charged based on anerroneous tax rate or sourcing rule thesystem needs to generate an electronicfeed and/or hardcopy report for shortpayment, credit or refund request purposes.A full-featured use tax system shouldfacilitate the use tax review, calculation andaccrual generation either in real-time orthrough periodic batch processing — daily,weekly, monthly or quarterly. Additionalselection or filtering functionality may berequired to help the user “slice and dice”transactional data to limit the consumer usetax review to a predetermined list of GLaccount numbers, specific vendors orother criteria.

In most cases, in order to obtain completeconsumer use tax functionality, the user’sAccounts Payable system needs to have aseparate field for the sales tax charged onthe invoice by the seller so the system candifferentiate between transactions that weretaxed by the seller and those that were not.Consumer Use Tax ReturnsAfter the consumer use tax review has beenperformed, all the required calculations arecomplete, and use tax accruals have beengenerated, an electronic file will need to befed into an automated tax return processingsystem for consumer use tax reporting. If anautomated tax return processing system isnot being utilized, then a hardcopy reportwill be needed for review and tax returnpreparation. Consumer use tax is reportedeither on a specific line or lines on a sales/use tax return or in a separate consumeruse tax return. Either way, all consumer usetax data should be labeled in such a wayto ensure that it can be populated in thecorrect area of the return.Putting It All Together —An Automated Approach,From Beginning to EndSelf-assessing consumer use tax is achallenge, and when performed manually— without the use of consumer use taxsoftware — it is a very labor intensiveprocess. The best approach to self-assessingconsumer use tax is to automate theprocess as much as possible using a robustconsumer use tax software system. Withsoftware specifically designed for consumeruse tax, companies can greatly minimizeor even eliminate self-assessment risksby automating the process based on thejudgment and interpretation of highlyqualified tax professionals.Consumer Use Tax Solutionsfrom CCHReduce the time you spend monitoringand updating tax rate and taxability rules.CorpSystem Sales Tax Office is a serverbased tax calculation engine that willhandle your most complex sales and usetax requirements. Sales Tax Office combinesindustry-leading tax rate and taxabilitycontent from CCH with highly accuratejurisdiction boundary information andsophisticated logic. The system supportsthe self assessment of consumer use taxon taxable purchases where tax wasn’tcollected by the supplier.CorpSystem Sales Tax Returns Onlinehelps you save time and eliminate errors byautomatically populating your sales and usetax forms, schedules and worksheets withtax information from your ERP system orfrom Sales Tax Office. Review, edit, print,audit and even e-file the signature-readyreturns, and download Detail Filing Reportsto streamline your check request process.Cut the cost of sales and usetax compliance, reduce youraudit risk, and streamline youroperations with solutionsthat are easy to implementand work directly with youraccounting software.

When you work with CCH, a Wolters Kluwer business, you can count on a variety ofexceptional support options, including:A Team of Experts — Professionally trained in all areas of tax and technical support, just atoll-free call away at 1-866-513-CORP (1-866-513-2677).CorpSystem.com — Instant online access to product and training information, supportand program updates.Regional Support Team — Ensures your smooth transition to the CorpSystem suite ofproducts and assists with any training needs.Effective Training Options — From in-office sessions to Web conferencing.For more information about the CorpSystem suite of sales tax, income tax and workflowsolutions call 1-866-513-CORP (1-866-513-2677) or visit ystem.comACS90089569 6/08200998CPS 2008 CCH. All Rights Reserved.

under or over self-assessing consumer use tax is high. Because a manual process is both labor- intensive and error-prone, an automated consumer use tax reporting system is actually more cost-effective than it may initially appear. This whitepaper examines self-assessment and reporting of consumer use tax and offers practical solutions for economically automating the process. Self-Assessment of .

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