When starting up a small business, you may find it necessary to buy equipment and supplies from companies around the country, or even the world, in order to get your business up and running. While these purchases may avoid sales tax at the time of purchase, many business owners don’t initially realize that they may then be subject to a local use tax upon arrival in your hometown.
Use tax is a type of tax imposed at the state or local level on goods that are purchased outside of the state, or city, but are then returned to, and used in, that state. For instance, a restaurant in Texas may buy large refrigerators and stoves from Oklahoma with the intent to ship them back to Texas for their chefs to use.
If the restaurant did not pay sales tax in Oklahoma, perhaps because the purchase was done on the internet, the restaurant may need to pay a use tax in Texas. In Texas, use tax is the same amount as sales tax – 6.25%. But cities and counties have the authority to impose an additional tax of up to 2% so it is important to check with your local government to determine what the overall rate might be.
Paying use tax in Texas is not as straightforward as paying sales tax, as it’s not automatically added to the purchase at the time of sale. Indeed, if you are purchasing items from out of the country, you may not even have the option to pay any tax at all when buying.
Instead, use tax is owed after the sale and should be paid directly to the comptroller of the state where the item will be used. So if you bought a piece of equipment on the internet without paying sales tax and are now using the item in Texas, you will owe a Texas Use Tax on that item. Typically, that tax is paid through your tax returns at the end of the year.
Use tax exemptions do exist, but they largely apply to certain purchasers, rather than the purchase of certain goods. Some examples of exemptions include:
Historically, small business owners have frequently overlooked the payment of use tax without much consequence. Before the increase in internet sales, purchases subject to use tax were difficult for states to identify and police. However, the growth of online retailing has caused many states to take a second look at use taxes and work much harder to enforce them, particularly for large purchases.
If you are a small business owner and you anticipate making significant purchases from an online retailer, out of the country, or in another state where you will not pay use tax, alert your accountant to these issues. Even better, consult with a small business attorney prior to your purchases to get on the right track.
Romano & Sumner, PLLC