Do You Have Use Tax Liabilities?

Do You Have Use Tax Liabilities?

Now is the time to learn more about reducing your potential tax risks. With Ohio's state budget deficit growing, Ohio tax authorities are becoming more aggressive in their attempt to raise revenue.  The information below summarizes what use tax is, how tax liability results and the steps you can take to reduce your unpaid tax liabilities.

What is use tax?

Use tax is imposed when you purchase a taxable item but don't pay sales tax. For example, if you buy something over the internet, from a catalog or directly from an out of state vendor, the vendor may not charge you sales tax on that item.  If the vendor does not charge you sales tax, you are responsible for paying use tax.

How could unpaid use tax liability result?

As part revenue raising initiatives, Ohio tax authorities are running matching programs on sales tax payers to see if the businesses also have use tax accounts.  If they determine that your business does not have a use tax account, they may schedule an audit. During the audit, a State of Ohio tax authority will visit your business and review purchase invoices to assess use tax on taxable purchases where no sales tax was paid.

There are marked risks in having tax authorities audit your business. Most significantly, if a use tax return was never filed, the State of Ohio has the right to audit your business all the way back to its date of origination. If you started your business in the 70's, 80's or even 90's, the magnitude of the unpaid use taxes, plus interest and penalties could be enormous.

How can you mitigate your unpaid use tax liability? 

A Voluntary Disclosure Agreement (VDA) may reduce your business' unpaid tax exposure. A CPA can help you determine whether you are eligible to enter into a Voluntary Disclosure Agreement. 

A Voluntary Disclosure Agreement is an anonymous way to come forward and admit that you should have been filing a tax return. The process begins when your CPA submits an anonymous letter to the State of Ohio. The Voluntary Disclosure Agreement provides the tax authorities with the facts about your business, such as the type of entity, type of business, the origination date, etc. But, the VDA does NOT give the State of Ohio your name. You are then assigned a VDA number and an agreement is sent back to you. The VDA often eliminates any non-filing penalties and typically limits the unpaid tax exposure to three to four years. Your CPA then works with you to determine the amount of your unpaid tax liability. You then remit the unpaid use tax amount, plus interest, to the State of Ohio and divulge your name. The State of Ohio will then assign you a use tax account number for future tax filings, and thus, your unpaid tax liabilities will be greatly reduced.