As mentioned in our recent blog, “A Guide to Navigating Sales and Use Tax Rules by State,” sales and use taxes are an area of common confusion among taxpayers nationwide. While the past blog speaks of sales and use tax considerations when selling goods, we are writing this blog for your reference on use tax liability for businesses that do not sell physical products.

Contrary to popular belief—just because your business is not required to register as a sales tax vendor, does not mean you are removed from sales and use tax obligations. If you do not want your business to be audited for failing to pay use taxes, make sure you are aware of your financial and reporting obligations!

What do I owe?

Whenever you purchase something online or in person without paying sales tax, you are still responsible to pay a use tax. Use tax rates vary by state, but are generally directly reflective of the sales tax rates.

For Massachusetts in 2016:

The sales tax rate in MA is 6.25% of the:

• Sales price of a product
• Rental charge of tangible personal property
• Certain telecommunications services sold or rented in the Commonwealth.

The use tax rate is the same and is assessed on any purchases under the three categories above if no sales tax was charged at the time of the purchase. For purchases made outside MA that were not charged sales tax, there is a use tax assessed if the product will be used in MA.

For Rhode Island in 2016:

The sales tax rate for RI is currently 7% which is assessed on all purchases and rentals of tangible personal property. Any purchases not charged sales tax, in or outside RI are charged with a 7% use tax.

Required forms

For RI businesses not registered to collect sales tax, a Consumer’s Use Tax Return must be submitted for any purchases with no sales tax assessed. In RI, the form must be submitted each month (on the 20th day of the month following the month when the purchase was made).

MA businesses that do not need to register for sales tax collections can annually file Form ST-10 the Business Use Tax Return to report and pay use tax (must be filed before April 15th for purchases made in the prior calendar year).

Are there penalties for not paying?

For RI, if you fail to pay your use taxes:

• Interest will be charged at 18% on all unpaid tax and penalty back to the time of purchase.
• You will incur a 10% penalty of the amount of tax found to be due.
• An additional 50% penalty can result if you fail to pay use taxes within the time frame due to fraud or purposeful avoidance of the tax.

For MA, failure to provide use tax payments will result in:

• A late filing penalty (1% of the unpaid tax per month), up to a maximum of 25%
• A late payment penalty for failure to pay the tax when it’s due (interest will be charged at the federal short-term rate plus four percentage points and compounded daily – currently that totals about 6%)

Tip: Filing use tax returns will generally invoke a statute of limitations period and a use tax audit will cover a period of 36 months. Failure to file use tax returns means there is no statute of limitations in play so most states will perform a 72 month audit. If a business files routine and regular use tax returns, the audit period is limited even if some of the use tax returns contain zero amounts.

Before filing a use tax return, you should first look into what items are specifically taxable. In many states there are items that are exempt from use tax. Some examples are: certain clothing, food ingredients, certain health care items, equipment used in a manufacturing process, and a host of other detailed and specific items.

The rules are confusing so be sure you understand and identify obligations for use tax. Use tax audits can be very expensive and applying good practices will help minimize that exposure.

For more details and questions- contact us.