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Ohio Use Tax

It's Not If, But When, You'll Have to Pay

By Chad Bice, CPA, principal / director of tax, Zanesville CPA office 
March 23, 2011 

Clarification: In July 2011, the state changed its enforcement of use tax law and limited the availability of the VDA program to those businesses who do not qualify for the new amnesty program. To see more up-to-date information, please read about Ohio's Use Tax Amnesty Program.

Ohio's Department of Taxation is stepping up efforts to enforce its use tax law in 2011. If your company does not have a use tax account, its no longer a question of if, but when, the department will contact you.

What Is Use Tax?

Use tax is a tax that wasnt paid, but should have been, on taxable property or services your business purchased. It most often occurs when a business purchases goods in-state, out-of-state or over the internet, and the retailer does not collect Ohio sales tax. In other words, if your company bought a taxable item or service which was used in Ohio and paid Ohio sales tax on it, you do not owe Ohio use tax. However if your business purchased a taxable item or service which was used in Ohio and did not pay Ohio sales tax on it and there is not a statutory exemption, exception, or exclusion from taxation, you may owe Ohio use tax.

How Does the State Know I Owe Use Tax?

With todays computerized systems, every business has a documented, verifiable electronic footprint. Ohios tax department is able to cross-reference its records of tax accounts against use tax and other types of state records. As a result, they will find businesses that dont comply with the use tax law.

The department has identified 380,000 companies in Ohio without use tax accounts. Starting in August, the agency will send letters to these companies.

How Do I Find Out More About Use Tax?

Through August 1, the department will be working to educate businesses about Ohio use tax through presentations, meetings, seminars and workshops. The department has developed a number of publications to assist small and medium-sized businesses in understanding the use tax law.

The departments website includes publications for contractors, manufacturers, retailers and service providers. In addition, the department provides publications explaining examples of potential use tax exposure due to purchases from out-of-state vendors, storage, snow removal, maintenance contracts, lawn care and landscaping; employee safety shoes, gloves, hard hats and respirators; and display fixtures, shelving units, cash registers and furniture, to name a few.

However, the Ohio Department of Taxations focus will shift from education to enforcement of the use tax law after August 1, 2011.

What Do I Need to Do Now?

If your business doesnt have a use tax account, take action quickly to help avoid penalties and a longer look-back period. The agency set up a voluntary disclosure agreement program, or VDA, that is more favorable if entered into before the state contacts your company.

Heres how it works:

 
If you chose to ignore the notice, one of two things will happen:

1. Your company will be audited
2. The Ohio Department of Taxation will send you a bill for your estimated tax due, plus interest and penalties 

By entering into a VDA before the state contacts you, you can reduce the amount you owe. Its a case of pay now, or pay much more later.  

Whats the Worst That Can Happen to Me?

A use tax audit would be time-consuming and costly for your business. An inquiry from the state forces you and your staff to search through receipts of purchases your business made over the past seven years. And the tax, interest and penalties can quickly add up.

• A 7 percent savings costs BIG dollars. One Ohio optometrists office praised its office manager for her ability to purchase items sales tax-free. Items ranged from eye patches to computers to furniture. The office manager purchased these items over the internet through vendors that did not charge sales tax and from small in-state vendors, saving the office the 7 percent sales tax costs on a tremendous amount of purchases over the years. The savings stopped, however, when the practice received an Ohio use tax audit. The audit went back seven years and cost the practice more than $60,000 in back taxes and penalties.
• No receipts, no proof of tax paid¦pay again. Another small business that made all of its purchases on credit cards to earn cash back and bonus points didnt save the sales receipts from purchases at area department stores and office supply businesses. After the small business had thrown away its receipts, the state of Ohio conducted a use tax audit. The state charged that the company was unable to prove it had paid sales tax on any of its purchases, and charged the business more than $20,000 in use tax, interest and penalties.

Can a VDA Really Save Me Money?

The owner of an Ohio manufacturing company knew the business had use tax liability and entered into a VDA prior to receiving a use tax notice from the State of Ohio. The VDA shortened the companys look-back period from seven to three years and saved it a sizable amount of interest and penalties.

In the end, by entering a voluntary disclosure agreement, the company was able to save between $100,000 and $300,000 in back taxes and penalties.

Ohio Use Tax Compliance

If your company doesnt have a use tax account, act quickly to avoid facing penalties and a longer look-back. Keep in mind you will need to review your companys purchases for the 36 months prior to the date you notified the state of your use tax obligation and determine what use tax you owe.

Contact our Ohio Use Tax Compliance Team

Contact us as soon as possible so that we can help you enter into a VDA agreement with the department. The ball is in your court. You are the one who can limit the back use tax and penalties you owe by being proactive and getting use tax help.

Note: This content is accurate as of the published date above and subject to change. Please seek professional advice before acting on any matter contained in the article.