Sales and use tax is currently a major source of revenue for Ohio and surrounding states – and a real challenge to business owners. The many pages of intricate code and regulations are difficult to decipher and the fact that they are continually changing presents even more obstacles. “It’s next to impossible for taxpayers to stay up to date with the latest law changes,” said Chad Bice, CPA, principal, Zanesville office. “As a result, there are many areas where businesses underpay, overpay or both.”
Underpayments
One of the most common errors businesses make is underpaying on taxable services. Currently, there are around 20 services that are taxable in the State of Ohio, some of which are missed. The second most common error is not paying use tax on out of state purchases. For example, companies don’t always understand that Ohio use tax may be owed even if sales tax was not charged by the out of state vendor. For example, if you buy a desk from a vendor in North Carolina and are not charged sales tax, you owe the State of Ohio tax on that desk. “If you’ve underpaid, the state reserves the right to charge interest and penalties,” said Bice. “Penalties for underpayment can be as high as 100 percent of the tax underpaid.” To reduce penalties, many states offer Voluntary Disclosure Agreements (VDA). If you were to go to the state and disclose underpayments, you could limit penalties as well as the look-back period.
Overpayments
Did you know the State of Ohio currently provides over 100 exemptions that help your business save tax dollars? While that’s good news, it also means there are more than 100 areas where you might be overpaying. Often, businesses are aware of an exemption, but do not know the details of the law well enough to properly apply it. If an exemption is interpreted too narrowly, you might have overpaid. “Overpayments can happen anywhere, but the manufacturing, packaging, warehousing and transportation for hire exemptions are often overlooked,” said Bice. If you believe you have overpaid your sales and use tax, you can file for a refund. The statute of limitations often ranges from three to four years from the date of the overpayment.
Audit Odds Increase
States, including Ohio, are hiring more auditors that are trained in multiple tax areas. These auditors are focusing on both normal transactions and big ticket items like airplanes, RVs and boats. Some auditors are even spending time at airports and marinas to catch non-compliant parties. “While the exact odds of your being audited cannot be calculated, one thing is for sure – that chance has increased,” said Bice. An audit is not a pleasant experience, so you should review your payments regularly to make sure they are accurate. And if you notice a mistake, seek help immediately. You may be able to file for a refund or enter into a VDA, advised Bice.
Training is Key
Education and periodic training can help limit over- and underpayments. Make sure you understand the laws and review your invoices regularly to make sure errors don’t exist. “Manuals and taxability matrices may help you determine whether or not you should pay sales tax on a given transaction,” said Bice. “It is worth the investment to develop these tools, especially if you consult with a sales and use tax professional who can help make sure you are maximizing cash flow and minimizing exposure.” Proper education, training and in-house procedures are the key to making proper taxability decisions.
This article was originally published in The Rea Report, Summer 2008 issue.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.