What Consumer Use Tax Looks Like Post-Wayfair

This article was originally published on AccountingWeb, 10/30/2018.

As the impact of the Supreme Court’s case on Wayfair Inc. continues to play out, some commentary has focused on different aspects of the decision including the fact that in all sales tax states, long-standing laws already compel consumers who make tax-free purchases to self-remit the taxes due.

These self-remit rules are referred to as “consumer’s use tax.” Although the consumer’s use tax rules focus on a purchaser’s duty to self-remit use taxes where no sales taxes are collected, it should be noted that, in some states, a seller may be obligated to collect “seller’s use taxes” on behalf of their purchasers.

Seller’s use taxes are charged to the purchaser on the sales invoice just like sales tax and are required to be collected by sellers in some states. Each state has its own complexities, which can cause occasional confusion for sellers.

On the subject of consumer’s use tax, it’s easy to speculate that the rate of compliance to self-remit is relatively low. However, as more and more sellers will collect sales or seller’s use taxes in the first place, economic nexus rules will make consumer’s use tax non-compliance a moot issue in many cases.

Business-to-Business Sales

Aside from everyday people who purchase from out-of-state sellers, consumer’s use tax compliance is not often so blithely ignored. In fact, consumer’s use tax compliance is a formidable challenge for many business purchasers in the United States.

Companies and organizations of all types – especially those with large operations, multiple locations or an otherwise highly visible profile – often regularly calculate, reserve and remit use taxes on purchases made where no sales taxes are paid. Whatever the reason, complying with use tax rules is an imperative, albeit tedious duty for many companies.

Proper, timely and accurate consumer’s use tax compliance can be a big challenge. After all, a use tax remitter needs to understand use tax rules and rates as they apply to their locations. Examples include:

• What is and what is not taxable – for example, a purchase of Software as a Service (SaaS) is taxable in Washington, but not in New Jersey.
• Which sales transactions use tax should apply – for example, purchases made for objects to be re-sold should be tax exempt, while other tax-free sales may be exempted based on the nature of an object’s use, such as how taxable manufacturing equipment may be exempted under certain circumstances.

Shifts in Collection Means Shifts in Compliance Systems

While the Wayfair decision will undoubtedly increase the scope of sales tax compliance for many sellers, the inverse will be true in other situations. Purchasers will see more and more purchases where sales tax is charged on the initial purchase, thus reducing purchasers’ consumer’s use tax compliance burden.

Reducing burdens is usually a good thing, and in the long run, the changes brought by the proliferation of economic nexus rules will reduce the compliance burdens of many consumer’s use tax remitters. In the meantime, purchasers might take the opportunity to review their use tax compliance systems.

For example, sales invoices from sellers who begin charging sales tax should no longer automatically accrue use tax. It may also be worthwhile for purchasers to analyze the taxability rules and rates applied by sellers who may be relatively new to the sales tax game in a purchaser’s state.

The Key Takeaway

As economic nexus rules take hold, sellers of all types will be obligated to collect sales or a seller’s use taxes on sales made all over the country. One offshoot will be a reduced consumer’s use tax compliance burden for some purchasers.

If your retail clients perform use tax compliance, this is an opportunity to discuss potential future effects on those efforts. It is also a good time to revisit use tax compliance processes and systems to avoid over-accrual of use tax.

It may also be worthwhile, at least for some time, to monitor incoming invoices for misapplication of sales tax rules or rates by sellers that lack a purchaser’s expertise in their home state.

Take the opportunity to share a silver lining to the proliferation of sales tax economic nexus rules with your clients: a potential reduction in a consumer’s use tax compliance obligations.