Robin's Ruminations

The State of Washington, and its various counties and municipalities, imposes on its citizens a rather regressive tax known as the sales tax.  The state's portion is 6.5% of most retail transactions.  Counties and municipalities usually add another 2% or 3%.  I describe it as regressive because lower income people (and businesses) tend to pay more of their income (on a percentage basis) on this tax than do those people (and businesses) who are, shall we say, more well off.  But the efficacy of the sales tax, in and of itself, is a topic for another time.  In this post I want to make sure you know about the sales tax's twin brother, the use tax.

Many small businesses, including myself and some other members of WSPSA, have learned about the use tax the hard way - by being hit with it as the result of an audit by the Department of Revenue.  If you are reading this from outside Washington you can equate our DoR with the IRS.

The use tax is simply the sales tax under another name.  It applies to exactly the same products and services to which the sales tax applies.  It comes into play when you purchase something but don't pay sales tax on the purchase.  In service businesses, such as process servers and legal messengers, the most common way this happens is when you purchase equipment or supplies from an out of state vendor (such as over the internet) who does not collect the sales tax from you.

So today you buy a computer from ComputersRUs on the internet and save a chunk of change by not paying the sales tax.  Tomorrow you buy office furniture from FurnitureRUs and again save anywhere from 6.5% to 10% (depending on your locality) by not paying the sales tax.  And so on. Time goes by and everything is just fine until the letter from the DoR arrives letting you know they will be in your office next week to conduct a random audit.  

All at once the use tax comes into play.  If you've "saved" quite a lot over the last several years by not paying sales tax you can get out your check book now and prepare to bleed because the auditor is going to apply the use tax on everything on which you failed to pay sales tax.  And you have to pay up ALL AT ONCE!  There might also be interest and penalties thrown in for good measure.

I was caught on this several years ago.  Fortunately all I had to pay use tax on was a laptop computer so the amount was rather modest.  But I learned my lesson.  I now track every purchase.  If the vendor doesn't collect sales tax at the time of the transaction I make a copy of the receipt and put it with my B&O tax information (Now there's another topic for another day!  For those of you out of state, think income tax).  When I pay my B&O taxes I compute the sales tax that wasn't paid and pay it at that time.  This is usually done on a quarterly basis so the numbers are modest.  I am absolutely religious about this because it is so much easier to pay a little at a time as opposed to paying several year's worth ALL AT ONCE during an audit.

Failing to pay the use tax is the most common tax error made by small business in the State of Washington.  Don't make yourself one of them.