If you have to collect sales tax, then chances are your report form asks you about use tax. Use tax is a sales tax on purchases taxable in your state but for which you were not charged. An example would be if you ordered office supplies from Amazon and you weren’t charged sales tax, but if you had purchased from your local office supply store, you would have paid the tax. You see this more often when you make out of state purchases, but you might find that a local supplier didn’t charge you sales tax, so you need to check. I’ve had landscape clients go through sales & use tax audits and often the auditor will find taxable purchases with no sales tax so the state wants the use tax.
Tracking Use Tax
Check with your accountant for what’s taxable and what is not. This varies by state, and sometimes by use. For instance,
- Downloadable software is taxable in some states, but not others
- Mulch might be taxable when used one way (e.g. for maintenance) but not taxable in design/build projects.
It’s easier to keep up with tracking as you go along, rather than waiting until the end of the report period, especially if you pay quarterly. So here are the steps to simplify your reporting.
- Setup a Use Tax Payable account – this is an Other Current Liability account
- When you make a purchase (bill, credit card charge, etc.), review the purchase to see if
- The item(s) is taxable
- If sales tax was charged (you might be surprised at who charges and who doesn’t!)
- If the item is taxable but no tax was charged, then you want to track Use Tax
- Calculate the sales tax and add to the cost of the item
- On the next line, subtract the new cost from what you paid, and that’s your use tax
- In the example below, the company paid $66.50 for office supplies. These would be taxable in this particular state, but no tax was charged. So $3.99 was added to the cost of the item and the 3.99 “deduction” puts 3.99 in the Use Tax Payable account.
- It’s up to you whether or not you want to add a note in the memo field letting you know if you paid sales tax or added use tax for report purposes. Personally, I do b/c it makes it easier for me when reviewing to make sure I have tax on all my taxable purchase.
Just like other balance sheet accounts, the Use Tax Payable account will have a running balance.
At the end of your tax reporting period, you can move the amount in the use tax payable account (for that period) to your sales tax payable account
- If you create a journal entry,
- Debit Use Tax Payable and credit Sales Tax Payable (and list your sales tax agency in the Name field)
- Set the date to the last date in the report period (e.g. 3/31 for a report period that ends in March)
- Or if you don’t like or understand journal entries, then
- Go into the Use Tax Payable register
- Enter your date
- Put the amount of use tax you owe in the decrease column and save/record.
- If you right-click on the transaction you just created, you’ll see the journal entry and you can add the tax agency in the Name column.
You can either run a balance sheet report, double-click on Use Tax Payable and change the date range or you can create and memorize a report for Use Tax.
- Click on Reports>Custom Reports>Transaction Detail
- On the Display tab,
- select your date range (e.g. Last Month, Last Fiscal Quarter)
- Select the columns you want to see
- Total by: you might want to total by Name or by Month (if more than 1 month) or just Total Only
- Sort by – You might want date or Name or Memo….
- On the Filter tab,
- Select Use Tax Payable from Account
- Choose your date range if not already done. I recommend using the drop-down dates instead of manually keying in the dates!
- On the Header Tab, name your report
- Run your report and then tweak as needed.
- Once you have the format you like, then Memorize!
Going forward, tracking Use Tax Payable will hopefully be much easier! Let us know if you need any help with this.