A Use Tax Audit Could Cost You Big

Chad Bice | July 27th, 2012

The State of Ohio is looking for additional tax dollars, and they’re not going to give you the benefit of the doubt if your business is audited for use tax. But you may be able to avoid a use tax audit if you qualify for a one-time opportunity to enter into the State of Ohio’s amnesty program.

About Ohio Use Tax

Your business may owe use tax when you make a purchase and sales tax isn’t paid but should have been on taxable property or services. It most often occurs when you make out-of-state purchases, in-state purchases from smaller vendors or purchases from Internet retailers that don’t collect Ohio sales tax.

If your business is located in the State of Ohio, it should have an Ohio use tax account. By cross-checking business registrations and other tax accounts statewide, the Ohio Department of Taxation identified more than 300,000 businesses that don’t have an Ohio use tax account. Soon, these businesses will receive notices from the state.

Ohio Use Tax Amnesty

Ohio’s use tax amnesty program is one of the most taxpayer-friendly programs ever enacted by the State of Ohio. The normal statute of limitations for Ohio use tax is seven years if you do not have an account. For taxpayers who elect to participate in the amnesty program, the look back period for which use tax must be paid is shortened to January 1, 2009, and forward.

During the amnesty period, taxpayers can come forward, self-report and pay their use tax from January 1, 2009, forward and pay interest and penalties abated. In return, Ohio will forgive use tax liabilities prior to January 1, 2009, and will register you for a use tax account. This program will eliminate a substantial amount of use tax, penalties and interest for thousands of Ohioans and their businesses.

Real Audit Costs

To lessen your chances of a use tax audit, your business should establish a use tax account if you don’t already have one. This account should ONLY be established through the amnesty program, which will also limit any liability you have. The longer you wait, the more it will cost.

A use tax audit could translate into your business owing thousands of dollars in use tax, interest and penalties to the state. Consider these two recent cases:

  • A security monitoring business with less than $1 million in gross sales didn’t have a use tax account with the Ohio Department of Taxation. Once flagged, the business was audited for a seven year period. Employees made credit card purchases at area home improvement and office supply stores, but they didn’t save the receipts. The business paid sales tax on those purchases, but the state assessed use tax on the business’ purchases from the “Big Box” retail stores anyway because they didn’t have receipts. 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 didn’t have a use tax account and the Ohio Department of Taxation audited it for a seven year period. Before the audit, the business’s accountant told them they should shred all accounting documents older than three years. With its older receipts discarded, the business couldn’t prove it paid sales taxes on any of those purchases. The result: use tax liability of more than $18,000.

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.

Contact Rea to Act Now

Ohio use tax amnesty is a great solution for businesses that are currently not use tax compliant. If your business waits too long, it could face a use tax audit back to January 1, 2008. 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 due.

If your company doesn’t have a use tax account, contact Rea & Associates.  Our Ohio tax services team will help you to crease a use tax account and file for Ohio use tax amnesty.  By acting now, you can reduce the amount you owe and protect your business from facing an audit.

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