A Use Tax Primer

Use Tax – What is it and does it apply to me?

Here in Washington, we are very used to Sales Tax.  In fact, Sales tax funds more than half of Washington’s budget.  Any time you buy an item (or purchase one of several services that are subject to Sales Tax) here in Washington, you will pay the local Sales Tax rate.  The state has a base 6.5% sales tax rate, and each region (generally, each city, but not exactly) has its own local rate tacked on top.  Mill Creek has the highest combined rate a 9.9%; several locations share the lowest combined rate at 7.5%.

Most of the time, paying sales tax requires no thought; the retailer charges you the tax and then passes that tax along to Washington Department of Revenue the next time they file their business tax return.  Your obligation as a buyer is typically met with no sweat.  But, it is possible for you to skip paying Sales Tax.  If you do, you are required to remit that Sales Tax on your own, using the local rate where the purchased item or service is used.  Paying Sales Tax after the fact is called Use Tax.

Let’s consider a few classic circumstances in which you might fail to pay Sales Tax:

  • You purchase the item out of state.  Maybe you went to Oregon for the weekend to do a little shopping.
  • You purchase something online from a retailer that does not have Washington Sales Tax Nexus. (Nexus means having enough business presence for the state to care.  If a company has a low level of business activity in Washington, the company is not subject to the requirement to collect and remit Washington Sales Tax, and the obligation of paying sales tax falls on the Washington consumer).
  • You purchase from a casual seller.  Perhaps you bought a set of shelves through Craiglist.
  • You purchase using your Reseller’s Permit.  If you operate a business that regularly purchases item for resale, you typically show your Reseller’s Permit at the time of the wholesale purchase.  Because Sales Tax is only required to be collected once along the supply chain, the wholesaler does not charge your business sales tax; instead, your business is expected to collect Sales Tax from its customers.  But, let’s say you keep some of the product for internal use.  Once you become the conusmer, Sales Tax is due. Think of the professional organizer who buys bins for her clients’ organizing needs.  She buys them at wholesale, using her Reseller’s Permit, and correctly pays no Sales Tax at the time of purchase.  (She will collect Sales Tax from her clients at the time they buy the bin from her).  But, instead of selling all of the bins to her clients, she decides to take one out of her inventory for her use in her office.  At the moment she pulls that bin out of inventory, Use Tax is due.  The professional organizer is the end-user of that bin; she has, in a way, become her own customer.  She becomes the one obligated to pay the Sales Tax.  And, her obligation to pay the Sales Tax comes in the form of Use Tax. 

How do I report Use Tax?

Honestly, many Washington consumers fail to report their Use Tax and never get caught.  But, as an individual consumer, you are supposed to complete this form and remit your Use Tax whenver the obligation arises.

Washington businesses are subject to much more scrutiny.  If your business is audited by the Washington Department of Revenue, the auditor will, without a doubt, review your Use Tax liability.   You should report your Use Tax obligation with your Combined Excise Tax return (also called your B&O tax return).  While its best to report the Use Tax in the period in which it was incurred; you can report it on an annual basis, even if your filing frequency is monthly or quarterly.

How do I record and track my Use Tax obligation?

Businesses should incorporate the tracking of Use Tax obligations into their regular bookkeeping procedures.  We recommend that you record the obligation at the time of recording the offending purchase.  Let’s take a real-life example from Moseley & Associates books.  A couple of weeks ago, we purchased some mailing labels from our online postage supply provider.  They failed to charge us sales tax.  So, we recorded the purchase with two lines:  one to record the full price, including sales tax, the other to record the obligation to pay Use Tax. 

When it comes time to file the Moseley & Associates Washington Combined Excise Tax return, we will report $41.90 of purchases and pay the calculated $4.02 of sales tax not paid at the time of purchase.

Note that when the Washington State Department of Revenue audits your business, they will require proof that you have paid Sales or Use Tax on every applicable purchase.  This means saving every single purchase receipt!  Your credit card statement does not show that Sales Tax was paid; you need original receipts with a separate line for Sales Tax.  Please save all purchase receipts for your business, in paper or electronic form.  It is best to save them by year, and within that, by expense category.

The Washington State Department of Revenue website is full of terrific resources on this topic.  You can start here on their Use Tax page and have fun browsing!  Of course, please let us know if you have any questions about Use Tax and how it impacts you and your business.