Tax catches some companies off guard

Many people hope to get around paying sales taxes by making purchases through out-of-state retailers, either by phone or via the Internet. But small-business owners looking to save some money in this way have to remember use taxes.

State law says that the use tax is a “compensating tax,” meaning that items that would be eligible for sales tax in-state are eligible for use tax if purchased from an out-of-state vendor.

The issue comes when an out-of-state vendor through which a transaction is made doesn’t have a physical location in Missouri and isn’t registered with the state Department of Revenue.

The responsibility for the tax falls on the purchaser.

Paul Seale found that out during a recent state inspection audit of his business. Seale, owner of Nixa-based Web design firm Alien Media, said he was lucky.

“Fortunately, for me, all the hardware I buy, I get from local vendors,” he said. “So it worked out that I didn’t have to worry about (use tax).”

It’s not surprising that the use-tax issue came up during a routine audit, according to Ed Samek, partner with Samek Fritz & Co. PC. He said that, although the use tax applies to individuals as well as businesses, companies are more likely to get hit for use-tax issues, for two reasons.

“Businesses are a lot more visible to the Department of Revenue and more subject to being audited than individuals,” Samek said.

“Usually, they’re required to have certain record keeping, and it’s easier for the department to examine their accounting records to see if there’s anything they should have paid taxes on and didn’t. Auditing a typical individual, I would think would be more difficult, because there aren’t those records to audit.”

The second reason: A $2,000 minimum on out-of-state purchases is required to qualify for the tax.

The use tax is intended to be a safeguard for one of the state’s biggest revenue sources; Missouri gets nearly 30 percent of its total collections from sales and use tax – $1.61 billion of $5.98 billion through the first nine months of fiscal year 2005–2006.

“It provides revenue, and it also levels the playing field for suppliers who are in state and would be required to charge sales tax to a local customer against an out-of-state supplier,” Samek said. “Due to (U.S.) constitutional constraints, the state can’t make a particular out-of-state supplier charge sales tax. So if you have an in-state customer buy something from an out-of-state supplier, without the use tax, that transaction would go untaxed.”

Alien Media’s Seale said he was caught a little off guard by the use-tax issue, even though it ended up not affecting his company.

“I wasn’t aware of, for example, if I bought a hard drive on eBay … (I) still have to pay use tax to the state of Missouri on it,” he said. “That came as a surprise.”

He added that the audit process, while frustrating, time-consuming and a little intimidating, was helpful overall.

“I felt better after talking to some other business owners about it. And they have on the Internet some frequently asked questions about sales tax – I found that very reassuring,” he said. “It was a good educational experience.”

Sales/Use Tax Rates

(April–June 2006)

Jurisdiction Sales Tax (%) Use Tax (%)

Christian County 5.725 4.225

Dallas County 6.225 4.225

Greene County 5.225 4.225

Polk County 5.225 4.225

Webster County 6.058 4.225

Nixa 7.225 4.225

Ozark 7.225 4.225

Republic 7.475 4.225

Springfield 6.600 5.600

Willard 7.225 6.225

Note: County rates are for unincorporated areas.

Source: Missouri Department of Revenue