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Consumer Use Tax – A Primary Target of Auditors?

Even though your business may have a good handle on charging its customers the correct amount of sales tax on all taxable transactions, your business purchases may not face the same amount of scrutiny.  This gap may lead to problems.  In fact, California found that for the 2011-2012 sales and use tax period audited, failure to pay consumer use tax was the number one issue for taxpayers.

What Is Consumer Use Tax?
Consumer use tax is simply the tax on purchases when sales tax is due but not collected.  Because it is triggered by the absence of a tax rather than the presence of something (i.e. a particular kind of transaction), it is a weak area for many businesses. 

Two Likely Scenarios

There are two likely scenarios that prompt consumer use tax liability:
1.    A purchase is made from an out-of-state seller who is not registered in the destination state and therefore does not charge the purchaser tax.
2.    A buyer places a purchased item in its resale inventory (and provides a resale exemption certificate to the vendor to prevent a tax charge), but then pulls the item from its stock and uses it rather than resells it.

Many times a company’s accounts payable process is not set up to flag non-taxed transactions.  When auditors arrive, one of the first things they like to review is purchases hitting key accounts in the general ledger.  Manufacturing companies in particular may use a lot of items themselves that are not incorporated into products or resold directly.

How to Reduce This Audit Risk
Companies looking to reduce this audit risk would do well to review their purchasing policies.  Who is authorized to provide exemption/resale certificates on purchases?  Are they properly trained?   Does accounts payable flag non-taxed items for further review?  Does the company have a self-assessment procedure in place for non-taxed but taxable transactions?  Does each purchase order contain clear language regarding taxability?  Additionally, companies can conduct self-audits to determine if their procedures are mitigating this audit risk.

How Can We Help? 
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of multi-state and local tax compliance and consulting for large US and global corporations.  We use that experience to your advantage.  Contact us and we can provide a customized cost-effective solution to meet your company’s needs.  For further information on Allyn Tax services, please contact:


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