Use tax automation - the new tax frontier.

• Author: O'Connell, Jr., Frank J.

As more states pass legislation adopting the necessary provisions of the Streamlined Sales Tax Project (SSTP), the idea of automating the calculation of sales tax on sales invoices becomes less novel. The momentum behind the SSTP is to overcome the barrier that Quill Corp. v. North Dakota places on states' efforts to require remote sellers to collect sales tax. (For background on the SSTP, see Naghavi et al., State & Local Taxes, "Streamlined Sales Tax: Accomplishments and Outlook" TTA, June 2003,p. 364.) If a state overcomes the barrier, the process is simplified for retailers. Most of the current proposals are for automating the sales tax collection process by using sales and use tax software.

Background

In the rush to streamline sales tax collection, the SSTP seems to have left out the most difficult sides and use tax choice that companies face--compliance for companies required to self-assess use tax.

Use tax is the little-known first cousin to sales tax. States with a sales tax have a compensating use tax to protect in-state sellers from unfair competition. Sales tax applies to intrastate sales of taxable goods; use tax applies to use, storage or consumption of taxable goods or services in a state other than the state in which purchased. Thus, in-state businesses cannot escape sales tax by importing taxable property from outside the state; once they use the property within a state, they accrue a use tax liability.

Theoretically, if all sellers collect sales and use tax in all states, purchasers would have little need to determine whether to self-assess use tax. Unfortunately, even if all retailers collected tax, purchasers would still face a myriad of difficult questions to determine whether to pay sales tax on certain purchases.

For example, several states allow sales tax exemptions for manufacturing equipment used in manufacturing. The rules for determining whether this exemption applies vary tremendously from state to state; many states' rules provide that if the equipment has a dual use, with only one use qualifying as manufacturing, then tax applies to the extent the equipment performs nonmanufacturing tasks.

Retailers who collect sales or use tax must collect either all of the tax charged on the invoice or none. Thus, the purchaser must decide whether to pay tax to the vendor and claim a refund on the exempt portion, or to pay no tax to the vendor, but self-assess use tax on the taxable portion. In addition, it must also...