People routinely forget to report taxable purchases. Taxable purchases are a matter of confusion. When a vendor does not charge sales or use tax on a purchase that is taxable under the law, the taxpayer should accrue and remit use tax on the sales and use tax return or other appropriate form as dictated by the state tax authority.
What are taxable purchases? (Example One)
If paintings are purchased via the internet and shipped from a New York vendor into Texas via common carrier and the New York vendor does not have nexus in Texas, the purchaser should report the value of the taxable paintings, including freight charges, in the taxable purchases section of the Texas sales and use tax return and remit the tax due.
NOTE: The example includes the detail that the paintings are shipped via common carrier because if the New York vendor does not have a presence in Texas, registration with the Texas Comptroller of Public Accounts is not required. Presence can be established by the entry of delivery trucks, personnel, locations, independent contractors, etc. depending on the rules governing the jurisdiction. It can also be established based on the level of economic activity the seller enjoys with Texas clients.
What are taxable purchases? (Example Two)
There are times that a seller who sells a taxable service and should collect sales tax fails to do so. They may not be registered to collect sales tax. They may not know that the service or product they provide is subject to sales tax. Whatever the reason, the purchaser is required to remit use tax to the taxing authority. There is no free ride based on the error of the vendor.
What is NOT a taxable purchase?
The value of any item or service that is not subject to tax is not reported as a taxable purchase. For example, the value of items that are exempt because they are sales for resale are not taxable purchases if the items are actually resold. The value of exempt manufacturing equipment is not reported as a taxable purchase if the usage of the machine is exempt, i.e. there is no divergent use. In addition, there are some services that some states do not tax. The rules governing taxability vary by state. Be sure to know the taxability of all products and services in jurisdictions in which you operate. Never assume that the rules of one jurisdiction apply in another context.
NOTE: Do not report items for which your vendor collected the correct amount of tax as a taxable purchase if you paid the invoice as billed. You paid the correct amount of tax to the vendor who collected it on behalf of the state. If you include this item in the taxable purchases section, you are paying tax twice.
For more information on taxable purchases, visit Taxable Purchases Made Easy!
How are taxable purchases remitted?
The value of the taxable purchase is included in the taxable purchases section of the return or using the form promulgated by the tax authority. It is imperative that a clear audit trail is maintained to show all purchases included in the number reported to the appropriate tax authority. Do not include taxable purchases with taxable sales. These sections are segregated for a reason.
Do not add the tax to an invoice and remit it to the seller. If the seller did not bill the tax, they have not assumed a duty to remit the funds to the taxing authority. They may not be able to do so. You, the purchaser and responsible party, have no reasonable expectation that the taxing authority has received the tax. It is safer to remit the tax directly to the state tax authority and retain all related documentation on your own behalf for the statute of limitations.
Remember that sales and use tax is due on taxable items or services without reference to whether the seller collects it. If they don’t collect the tax, remit it to the taxing authority directly. One important note is that some jurisdictions require that sellers that operate in multiple states identify the state for which tax is being collected. Ask questions and maintain your documentation.
For access to an online class on how to file a Texas sales and use tax return, including Taxable Purchases, visit Understanding Your Texas Sales and Use Tax Return.