Note: Ohio has established a tax amnesty program since this post was originally created.
Keeping meticulous records has never been more important than it is today. With today’s governmental agencies looking for additional dollars, they’re not going to give you the benefit of the doubt should your business be audited for use tax. Consider these two recent cases:
A security monitoring business with less than $1,000,000 in gross sales did not have a use tax account with the Ohio Department of Taxation. Once flagged, the business was audited for a seven year period. Even though the business had paid sales tax on purchases employees made on credit cards at area home improvement and office supply stores, because employees had not saved the receipts from the purchases, the state assessed use tax on the business’ purchases from the “Big Box” retail stores. The result: the business paid more than $7,000 in use tax at the conclusion of the audit.
A small construction company with less than $500,000 in sales did not have a use tax account and was audited by the Ohio Department of Taxation for a seven year period. The business had received advice from their accountant prior to the audit that it could shred all accounting documents older than the previous three years. With its older receipts discarded, the business was unable to prove it had paid sales taxes on any purchases made prior to three years ago. The result: use tax liability of more than $8,000.
Businesses owe use tax when a purchase is made and tax wasn’t paid but should have been on taxable property or services your business bought. It most often occurs when purchases are made out-of-state, in state from smaller vendors or over the internet and the retailer doesn’t collect Ohio sales tax.
If your business is located in the State of Ohio, it should have an Ohio use tax account. The Ohio Department of Taxation is currently cross-checking business registrations and other tax accounts statewide and has already identified more than 300,000 businesses that do not have Ohio use tax accounts. The department will soon be sending notices to all businesses that do not have a use tax account.
To lessen your chances of a use tax audit, your business should establish a use tax account if it doesn’t already have one. If you do owe use tax on items or services, your business should enter into a voluntary voluntary disclosure agreement as soon as possible. The longer you wait, the more it will cost your company. After July 31, 2011, the Ohio Department of Taxation is extending its look-back period for use tax voluntary disclosure agreements from three years to four. And, if your business waits too long, it could face a seven-year use tax audit. And worse yet, the department could create an estimate of use tax owed, and your company would have to prove to the state that it does not owe the estimated amount.
Above all, be sure to protect and maintain your purchase and receipt records to prove that your company paid sales tax on its purchases. Being able to document your payment of sales tax could save your company thousands of dollars.
Your REA accounting professional can assist you in setting up a use tax account and entering into a voluntary disclosure agreement. This agreement must be received prior to receiving an audit notice from the state. The VDA will require your business to review 36 months (from the date you notify the state) of purchases. For additional information, click here to connect with a Rea & Associates Ohio Use Tax Professional.