Be Aware of Use Tax: The Stealth Tax

When businesses are audited by the WV State Tax Department the result is often a very expensive vocabulary lesson that bold-stamps the term “use tax” into the owner’s lexicon. Most business owners are very familiar with the proper collection and remittance of sales tax. Sales tax’s cohort, use tax, however, often remains unnoticed until an auditor tallies up a jaw-dropping deficiency bill. In today’s article, we will discuss the basics of use tax as it applies to your business. Our goal is to help spark “use tax” recognition when you make an internet or out-of-state purchase, not a few years later when an auditor asks to see receipts for all your major purchases.

According to the WV Department of Tax and Revenue “use tax is tax a 6% tax on the use of tangible personal property or services in West Virginia where sales tax has not been paid.” This means that if you or your business purchases an item from someone located outside West Virginia and bring it into West Virginia (where it used or consumed), that purchase is subject to the same sales tax rules as any other West Virginia purchase. Under such circumstances the tax is called use tax, not sales tax, and it is the buyer’s responsibility to pay, not the sellers.
The buyer must report and pay use tax but gets a credit for any sale tax paid to the state where the items were originally purchased.

Here are some common situations that get taxpayers into trouble:

Your business buys $10,000 worth of computer equipment for its West Virginia office from an online computer vendor. The vendor does not charge sales tax. Your business must remit the $600 (10,000 times 6%) in use tax to the West Virginia department of tax and revenue.

Your Business purchases a $30,000 piece of heavy equipment from an individual (or at an auction) in another state and you bring it into West Virginia for use in your construction business. You do not pay sales tax on the purchase. You must remit $1,800 (30,000 times 6%) in use tax to WV.

You hire a doctor from another state who comes into West Virginia to conduct physicals on your employees. Although the services are performed in West Virginia they are exempt from sales tax as professional services and, therefore, are not taxable under use tax.

As a final example, consider this common scenario: Your office manager lives in Virginia. She routinely purchases office supplies for your West Virginia office in Virginia. Over the course of the year, she purchases $10,000 of supplies using your business credit card. These purchases are subject to use tax but you get a credit for taxes paid to Virginia. Since Virginia has a tax rate of 5% (4% state and 1% local) you will get a credit for the $500 sales tax ($10,000 times 5%) paid to Virginia. However, because West Virginia has a tax rate f 6% you will still owe $100 ($10,000 * 6% = $600, minus $500 = $100) to West Virginia on these purchases.

Many would argue that the complexity and reporting requirements of use tax place an undue burden on taxpayers. Most business owners simply don’t have time to review every purchase for potential use tax liability and they don’t have the money to pay their accountant to analyze every receipt. On the other hand, the state might argue that noncompliance results in millions of lost tax dollars, a situation that has gotten worse with the growth of internet purchases. They might also argue that out-of-state sellers who do not follow to same rules have an unfair advantage over in-state sellers of the same products. This unfair advantage drains money from both the local economy as well as its tax base. Use tax simply levels the playing field.
Regardless of your opinion, Use Tax is here to stay. Long-forgotten, receipt-filled shoe boxes will continue to provide a treasure-trove of unpaid Use Tax (plus penalty and interest, of course) for the unwary.

To reduce your chances of falling into the Use-Tax-Trap take the following steps:

First, make sure your internet and out-of-state suppliers charge sales tax on all your purchases.
Second, remember infrequent out-of-state purchases of high-priced equipment are major source of use tax liability. And finally, make a mental note of the term “use tax.” Simply recognizing potential liability and paying use tax when it’s due can save thousands in penalties and interest down the road.

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Green Tax Roundup

In recent columns we have discussed tax incentives that the federal government offers to increase demand for energy saving and energy-generating technologies.  Such incentives do not stop at the federal level.  West Virginia recently enacted two initiatives to help taxpayers save money while helping the environment.  These initiatives are the Energy Star Sales Tax Holiday and the Residential Solar Energy Tax Credit.  In this article we will discuss these new, WV incentives and review existing federal credits.  Keep this information handy as you shop for new appliances or consider renovating your home.  It may help to reduce your electric and tax bills while shrinking your carbon footprint.

1. The Energy Star Tax Holiday will reduce the price of certain Energy Star products by 6% if purchased between September 1st and November 30th this year.  The “holiday” achieves this savings by exempting these purchases from sales tax.  To qualify the product must cost $5,000 or less, be a qualifying Energy Star product, and be purchased for personal use.  Purchases made for commercial or business use do not qualify. 

The tax exempt purchases apply to both new and used Energy Star products.  Internet and catalog purchases also qualify as long as the items are both paid for and delivered between September 1st and November 30th.  Shipments delayed due to backlogs or being temporarily out-of-stock will still qualify.

The Energy Star designation is awarded by the Environmental Protection Agency to products that meet certain energy efficiency guidelines.  According to a West Virginia Tax Department, the use of Energy Star products can reduce household energy consumption by 30%, saving the typical household more than $700 each year. 

2. In June, 2009 West Virginia passed a tax credit for those who purchase and install qualified solar property after July 1, 2009.  The credit will reimburse 30% of the costs of purchasing and installing solar systems that generate electricity, heat or cooling, or provide hot water for the residence they own.  To qualify, water heating systems cannot be used to heat a pool or hot tub and must derives at least 50% of its heat-energy from the sun.

The credit maxes out at $2,000 and is non-refundable (meaning it will reduce your tax liability to zero but will not generate a refund beyond taxes paid in).  Any credit remaining after being applied to the current year can be carried forward to future years.  One caveat: legislative rules have yet to be written for this new credit.  As a result, we are awaiting clarification on a number of issues.  These include; whether residential rental properties and vacation homes qualify, whether the $2,000 maximum is an annual limit, a lifetime limit per taxpayer, or per-residence limit, and whether the code’s phrase “taxpayer who installs or causes to be installed” includes residential builders. 

The West Virginia Sales Tax “holiday” and solar credit round off a generous collection of tax incentives for those who decide to go green.  Federal incentives include the Residential Energy Property Credit (REPC) and the Residential Energy Efficiency Property Credit (REEPC – also called the Residential Renewable Energy Tax Credit).  We have discussed these credits before and will briefly summarize below.  Please visit http://www.Journal-news.net for more information. 

3. The Residential Energy Property Credit reimburses taxpayers for 30% of qualifying, energy-saving home improvements “placed in service” between January 1st 2009 and December 31, 2010.  The total credit for all improvements cannot exceed $1,500 for the two years combined.  Qualifying products include certain Energy Star-certified roofing, water heaters, HVAC systems, windows and doors, insulation, and biomass stoves.  Installation costs of HVAC systems, water heaters, and stoves can be included when determining the credit.  Installation costs for windows, doors, insulation and roofs, however, do not qualify.  The credit is non-refundable and cannot be carried forward.

4. The Residential Energy Efficiency Property Credit will reimburse taxpayers for installing certain “green” energy systems in their new or existing homes.  The credit provides a nonrefundable, unlimited reimbursement for 30% of costs incurred to purchase and install the following systems between January 1st 2009 and December 31st 2016: solar electric, solar water heating, wind-energy, and geothermal heat pump equipment.  Unlike the REPC, any unused credit can be carried forward to the following tax year.

The tax incentives for “going green” have never been better.  If successful, that is, if they increase demand for green products and competition among suppliers, then costs will decrease while green technology advances.  If this happens we will all reap the rewards of cheaper energy, a cleaner environment, and energy independence.

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Use Tax: The WV Stealth Tax

If your business has ever been audited by the WV State Tax Department the result may have included a very expensive vocabulary lesson.  It is a lesson that forever stamps the phrase “Use Tax” into your, the owner’s, lexicon.

Most business owners are very familiar with the proper collection and remittance of sales tax.  One section, the Use Tax section, of your sales tax return, however, remains unnoticed by many until an auditor tallies up a jaw-dropping deficiency bill.  In today’s article, I will discuss the basics of Use Tax.  My goal is to help trigger a spark of “Use Tax” recognition long before an auditor asks to see years of receipts for major purchases.

Use Tax Defined:  According the tax department, Use Tax is “imposed upon the use within West Virginia of tangible personal property and services bought or leased outside West Virginia for use or consumption within this State.”  What this basically means is if you (Yes you. Use tax can also apply to individuals.) or your business purchase an item (or contract for a service) from a location outside West Virginia and bring it into West Virginia (where it is used, consumed, or the service is performed), that purchase is subject to the same sales tax rules as any other West Virginia purchase.  The difference is that under these circumstances the tax is called Use Tax, not sales tax, and it is the buyer’s responsibility to pay, not the seller’s.  The buyer must report and pay Use Tax but will get a credit for any sale tax paid to the state where the items were originally purchased.

Here are some common situations that get taxpayers into trouble:

Situation: You buy $10,000 worth of computer equipment for your West Virginia office from an online computer vendor.  The vendor does not charge sales tax.  Your business must remit the $600 (10,000 * 6%) in Use Tax to the West Virginia Department of Tax and Revenue.

Situation: You purchase a $30,000 piece of heavy equipment in another state and bring it into West Virginia for use in your construction business.  You do not pay sales tax on the purchase.  You must remit $1,800 (30,000 * 6%) in Use Tax to WV.

Situation: You hire a doctor from another state who comes into West Virginia to conduct physicals on your employees.  Although the services are performed in West Virginia they are exempt from sales tax as a professional service and, therefore, are not taxable.  You do not owe Use Tax on this purchase.

Situation: As a final example, consider this common scenario: Your office manager lives in Virginia.  She routinely purchases office supplies for your West Virginia office in Virginia.  Over the course of the year, she purchases $10,000 of supplies using your business credit card.  These purchases are subject to Use Tax but you get a credit for taxes paid to Virginia.  Since Virginia has a tax rate of 5% (4% state and 1% local) you will get a Use Tax credit for the $500 sales tax ($10,000 * 5%) paid to Virginia.  But, because West Virginia has a tax rate of 6% you will still owe $100 ($10,000 * 6% = $600, minus $500 = $100) to West Virginia on these purchases. 

An Undue Burden: Many would argue that the complexity and reporting requirements of Use Tax place an undue burden on taxpayers.  Most business owners simply don’t have time to review every purchase for potential Use Tax liability and they don’t have the money to pay their accountant to analyze every receipt.  On the other hand, the state might argue that noncompliance results in millions of lost tax dollars, a situation that has gotten worse with the growth of internet purchases.  They might also argue that out-of-state sellers who do not follow the same rules have an unfair advantage over in-state sellers of the same products.  This unfair advantage drains money from both the local economy as well as its tax base.  Use Tax simply levels the playing field.

Use Tax is here to stay: Regardless of your opinion, Use Tax is here to stay.  Long-forgotten, receipt-filled shoe boxes will continue to provide a treasure-trove of unpaid Use Tax (plus penalty and interest, of course) for the unwary.  To reduce your chances of falling into the Use-Tax-Trap take the following steps:

The Bottom Line: Simply recognizing the potential liability and paying Use Tax when due can save thousands in penalties and interest down the road.

 

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Be Aware of Use Tax: The Stealth Tax

Be Aware of Use Tax: The Stealth Tax

When businesses are audited by the WV State Tax Department the result is often a very expensive vocabulary lesson that bold-stamps the term “use tax” into the owner’s lexicon. Most business owners are very familiar with the proper collection and remittance of sales tax. Sales tax’s cohort, use tax, however, often remains unnoticed until an auditor tallies up a jaw-dropping deficiency bill. In today’s article, we will discuss the basics of use tax as it applies to your business. Our goal is to help spark “use tax” recognition when you make an internet or out-of-state purchase, not a few years later when an auditor asks to see receipts for all your major purchases.

According to the WV Department of Tax and Revenue “use tax is tax a 6% tax on the use of tangible personal property or services in West Virginia where sales tax has not been paid.” This means that if you or your business purchases an item from someone located outside West Virginia and bring it into West Virginia (where it used or consumed), that purchase is subject to the same sales tax rules as any other West Virginia purchase. Under such circumstances the tax is called use tax, not sales tax, and it is the buyer’s responsibility to pay, not the sellers.
The buyer must report and pay use tax but gets a credit for any sale tax paid to the state where the items were originally purchased.

Here are some common situations that get taxpayers into trouble:

Your business buys $10,000 worth of computer equipment for its West Virginia office from an online computer vendor. The vendor does not charge sales tax. Your business must remit the $600 (10,000 times 6%) in use tax to the West Virginia department of tax and revenue.

Your Business purchases a $30,000 piece of heavy equipment from an individual (or at an auction) in another state and you bring it into West Virginia for use in your construction business. You do not pay sales tax on the purchase. You must remit $1,800 (30,000 times 6%) in use tax to WV.

You hire a doctor from another state who comes into West Virginia to conduct physicals on your employees. Although the services are performed in West Virginia they are exempt from sales tax as professional services and, therefore, are not taxable under use tax.

As a final example, consider this common scenario: Your office manager lives in Virginia. She routinely purchases office supplies for your West Virginia office in Virginia. Over the course of the year, she purchases $10,000 of supplies using your business credit card. These purchases are subject to use tax but you get a credit for taxes paid to Virginia. Since Virginia has a tax rate of 5% (4% state and 1% local) you will get a credit for the $500 sales tax ($10,000 times 5%) paid to Virginia. However, because West Virginia has a tax rate f 6% you will still owe $100 ($10,000 * 6% = $600, minus $500 = $100) to West Virginia on these purchases.

Many would argue that the complexity and reporting requirements of use tax place an undue burden on taxpayers. Most business owners simply don’t have time to review every purchase for potential use tax liability and they don’t have the money to pay their accountant to analyze every receipt. On the other hand, the state might argue that noncompliance results in millions of lost tax dollars, a situation that has gotten worse with the growth of internet purchases. They might also argue that out-of-state sellers who do not follow to same rules have an unfair advantage over in-state sellers of the same products. This unfair advantage drains money from both the local economy as well as its tax base. Use tax simply levels the playing field.
Regardless of your opinion, Use Tax is here to stay. Long-forgotten, receipt-filled shoe boxes will continue to provide a treasure-trove of unpaid Use Tax (plus penalty and interest, of course) for the unwary.

To reduce your chances of falling into the Use-Tax-Trap take the following steps:

First, make sure your internet and out-of-state suppliers charge sales tax on all your purchases.
Second, remember infrequent out-of-state purchases of high-priced equipment are major source of use tax liability. And finally, make a mental note of the term “use tax.” Simply recognizing potential liability and paying use tax when it’s due can save thousands in penalties and interest down the road.

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Green Tax Roundup

Green Tax Roundup

In recent columns we have discussed tax incentives that the federal government offers to increase demand for energy saving and energy-generating technologies.  Such incentives do not stop at the federal level.  West Virginia recently enacted two initiatives to help taxpayers save money while helping the environment.  These initiatives are the Energy Star Sales Tax Holiday and the Residential Solar Energy Tax Credit.  In this article we will discuss these new, WV incentives and review existing federal credits.  Keep this information handy as you shop for new appliances or consider renovating your home.  It may help to reduce your electric and tax bills while shrinking your carbon footprint.

1. The Energy Star Tax Holiday will reduce the price of certain Energy Star products by 6% if purchased between September 1st and November 30th this year.  The “holiday” achieves this savings by exempting these purchases from sales tax.  To qualify the product must cost $5,000 or less, be a qualifying Energy Star product, and be purchased for personal use.  Purchases made for commercial or business use do not qualify. 

The tax exempt purchases apply to both new and used Energy Star products.  Internet and catalog purchases also qualify as long as the items are both paid for and delivered between September 1st and November 30th.  Shipments delayed due to backlogs or being temporarily out-of-stock will still qualify.

The Energy Star designation is awarded by the Environmental Protection Agency to products that meet certain energy efficiency guidelines.  According to a West Virginia Tax Department, the use of Energy Star products can reduce household energy consumption by 30%, saving the typical household more than $700 each year. 

2. In June, 2009 West Virginia passed a tax credit for those who purchase and install qualified solar property after July 1, 2009.  The credit will reimburse 30% of the costs of purchasing and installing solar systems that generate electricity, heat or cooling, or provide hot water for the residence they own.  To qualify, water heating systems cannot be used to heat a pool or hot tub and must derives at least 50% of its heat-energy from the sun.

The credit maxes out at $2,000 and is non-refundable (meaning it will reduce your tax liability to zero but will not generate a refund beyond taxes paid in).  Any credit remaining after being applied to the current year can be carried forward to future years.  One caveat: legislative rules have yet to be written for this new credit.  As a result, we are awaiting clarification on a number of issues.  These include; whether residential rental properties and vacation homes qualify, whether the $2,000 maximum is an annual limit, a lifetime limit per taxpayer, or per-residence limit, and whether the code’s phrase “taxpayer who installs or causes to be installed” includes residential builders. 

The West Virginia Sales Tax “holiday” and solar credit round off a generous collection of tax incentives for those who decide to go green.  Federal incentives include the Residential Energy Property Credit (REPC) and the Residential Energy Efficiency Property Credit (REEPC – also called the Residential Renewable Energy Tax Credit).  We have discussed these credits before and will briefly summarize below.  Please visit http://www.Journal-news.net for more information. 

3. The Residential Energy Property Credit reimburses taxpayers for 30% of qualifying, energy-saving home improvements “placed in service” between January 1st 2009 and December 31, 2010.  The total credit for all improvements cannot exceed $1,500 for the two years combined.  Qualifying products include certain Energy Star-certified roofing, water heaters, HVAC systems, windows and doors, insulation, and biomass stoves.  Installation costs of HVAC systems, water heaters, and stoves can be included when determining the credit.  Installation costs for windows, doors, insulation and roofs, however, do not qualify.  The credit is non-refundable and cannot be carried forward.

4. The Residential Energy Efficiency Property Credit will reimburse taxpayers for installing certain “green” energy systems in their new or existing homes.  The credit provides a nonrefundable, unlimited reimbursement for 30% of costs incurred to purchase and install the following systems between January 1st 2009 and December 31st 2016: solar electric, solar water heating, wind-energy, and geothermal heat pump equipment.  Unlike the REPC, any unused credit can be carried forward to the following tax year.

The tax incentives for “going green” have never been better.  If successful, that is, if they increase demand for green products and competition among suppliers, then costs will decrease while green technology advances.  If this happens we will all reap the rewards of cheaper energy, a cleaner environment, and energy independence.

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