Be aware of the bottom line: sales and use tax

March 16, 2012

By J.R. Armstrong

With the exception of only five states (Alaska, Delaware, Montana, New Hampshire and Oregon), state governments assess a broad-based sales and use tax on purchases made by their residents. 

In fact, sales and use taxes account for an average of more than 30 percent of each state’s annual revenue!

Despite its prevalence, many optometrists are unfamiliar with the use tax and the responsibility they have to report it. 

While similar, sales tax and use tax have several key differences.  Sales tax is generally calculated and collected from the consumer at the point of sale. 

The retailer is responsible for collecting sales tax from the consumer and remitting it to the appropriate state agency. 

Use tax, however, is not collected by the retailer, and it is the consumer’s responsibility to calculate what is owed, and then remit payment to the state. 

Use tax is assessed on tangible items purchased for use, storage or consumption within the state, even if the sale took place elsewhere, including purchases made over the Internet, through mail-order catalog, or in another state. 

Another way to define use tax is sales tax that has not been yet paid. Purchases of inventory are not subject to use tax, but a valid resale certificate is required in most states.

The rule regarding sales and use taxes can be difficult to navigate; doing some homework in advance can save a lot of headaches later.

Most people unknowingly contribute to the estimated $23 billion in uncollected sales and use taxes owed to state governments each year.

Cash-strapped states have been aiming to increase their revenues by stepping up their enforcement of sales and use tax laws. The first target, it seems, is online retailers. 

The 1992 Supreme Court case, Quill v. North Dakota, ruled that a state government cannot compel a retailer to collect sales tax on its behalf unless the retailer has a physical presence in the state. 

New York State recently was able to circumvent this ruling with its so-called “Amazon Law.”  The law says out-of-state Internet retailers can be said to have a physical presence in the state if they generate over $10,000 in sales via in-state affiliates. 

Affiliates have their own Web sites, but allow the retailer to post ads or links on their Web sites. 

When a customer clicks on the ad, and makes a purchase on the retailer’s Web site, the affiliate receives a commission. 

This measure, which is quickly being adopted by other states, will require Internet retailers, such as Amazon.com and Overstock.com, to calculate, collect, and remit sales tax to the state government.

However, states wanting to close their budget shortfalls aren’t stopping there, as evidenced by a sharp increase in the number of sales and use tax audits conducted over the past few years. 

Because performing use tax audits on individual consumers is not economically feasible, most states are making strong efforts to ensure that businesses are properly collecting and remitting sales tax from customers, as well as paying use tax on their own out-of-state purchases.

Some taxing authorities are enlisting private companies to perform their audits, often paying them a percentage of the additional tax collected as a result of the audits.  

In addition, states are utilizing information sharing to improve sales and use tax compliance. Many state taxing agencies are now exchanging information in order to more efficiently select and conduct audits. These information-sharing agreements allow state officials to gather information from out-of-state retailers about sales shipped to their states, and the recipient is often targeted for an audit. 

Be wary of vendors who push products stating they are free of states taxes. They often conveniently omit that there is a responsibility to pay use tax on the purchase. 
When an auditor assesses use tax, the vendor is seldom eager to chip in on the bill.

As business owners, it is important for optometrists to know their responsibilities as both vendors and consumers, and to take steps to prepare for sales and use tax audits. 

Optometrists can be subject to a use tax payment if they purchase ophthalmic equipment or practice software from an out-of-state vendor.

Patients could be subject to use tax if they purchase eyeglasses or replacement contact lenses online, whether through a national service such as 1-800 Contacts or a link on a practitioner’s Web site.

The first step is to become familiar with the sales and use tax laws to which a practice may be subject. 

Because sales and use taxes are levied by state and local governments, rather than the federal government, the laws vary from state to state, and even city to city.

Each of 45 states, 4,696 cities, 1,602 counties, and 1,113 other jurisdictions in the United States that levy a sales tax have different rules, rates, and filing requirements. 

Fortunately, the courts have ruled that businesses are only responsible for collecting and remitting sales taxes for states in which they have a physical presence. 

However, business people should have a thorough understanding of the rules governing sales taxes in their state.

A general understanding of how sales taxes are applied across the nation will not be sufficient. 

Moreover, optometrists who practice in more than one state should be familiar with the sales tax laws in each.

Also complicating the collection of sales tax for optometrists is the distinction between services and products. 

Sales taxes are levied on tangible items; so services, such as eye examinations, do not require payment of sales tax.

In most states, the sale of prescription contact lenses or eyeglasses (including both the frames and lenses) also is not a taxable event. 

However, in many cases, the sale of contact lens or eyeglass cases, contact solution, or cleaning solution for glasses is subject to sales tax.

A very good source of information for practitioners is the state optometric association or the state department of revenue.

The state association will generally be a great starting point because the association likely had a hand in crafting the state law regarding the taxation of eye care-related products. 

Likewise, when purchasing products or equipment, it is important for a practitioner to conduct some research on the taxability of the purchase.

It may be subject to use tax, especially if the vendor is based out of state or does not charge sales tax. 

The second step is to maintain proper records. 

It is important for practitioners to research the statute of limitations for tax audits in their states. 

Most states have a statute of three to seven years.

Because the state may select any of the years within the statute for an audit, practitioners must keep all financial records for at least the length of their state’s statute.

If a practice is selected for a sales tax audit, it may be time to contact a tax professional.

Sales tax audits require a significant amount of time and are generally conducted on-site. 

A tax professional will be able to assist the practice staff in pulling together the required documentation and may even be able to host the auditor for the duration of the audit.

The old adage “if it’s too good to be true, it probably is” could serve as the marquee slogan for use tax.

Don’t get caught in the use tax trap.  Anyone making a purchase, but unsure if it will be subject to use tax, should contact a tax professional. 

If a use tax infraction is uncovered in the course of an audit, the interest and penalties on the unpaid taxes can quickly add up.

J.R. Armstrong, C.P.A. is a partner in the firm of May & Company, LLP.  Jodi Permenter, C.P.A. is a member of the professional staff of May & Company, LLP.  The firm consults with optometrists in 30 states, assisting with their tax planning and preparation, QuickBooks support, and business planning.  May & Company was established in 1922 and has offices in Louisiana, Mississippi, and Alabama.  J.R. can be reached at 601-636-4762 or by e-mail at jarmstrong@maycpa.com.

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