Use Tax (PowerPoint)

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					      Department of Revenue

Use Tax / Nov. 2011
                        What is Use Tax?

• Tax on tangible personal property, services and products
  transferred electronically when no sales tax (or not enough
  sales tax) was paid. Use tax rate is the same as sales tax

• A tax is hereby imposed on the privilege of the use,
  storage, or consumption in this state of tangible personal
  property, services, and products transferred electronically at
  the same rate imposed on sales tax. (Effective 1939)
• Why didn’t the retailer change me sales tax?

• The Federal Interstate Commerce Clause does not require
  a retailer located outside South Dakota to comply with our
  tax laws unless the retailer has a physical presence
  (nexus) in SD.

• Most Internet companies do not have a physical presence
  in South Dakota.
Majority of the Audit Assessments are

Use Tax applies where the customer uses,
stores or consumes the goods or services.
      When sales tax is not properly charged, use tax applies.

          Retailer pays Sales tax - Purchaser pays Use tax.

   Same rate as the state and municipal sales tax.

   Applies to purchase price-including freight or delivery charges.
         Example: You purchase a book online for $15 + $2 shipping.
         Use tax is due on $17.

   If product or service purchased is exempt from sales tax, it is also
    exempt from use tax.
Use tax is normally incurred when:
 Items are taken from inventory for business or personal use.

 Items are purchased without sales tax such as purchases from out-
  of-state suppliers, Internet or mail order companies.
 Services are purchased without sales tax.
 Rental receipts on equipment brought in from another state.
 Construction materials removed from inventory for use in another
 The purchase of promotional items.
 Service providers purchase of items used to provide the service.
  Use tax is normally incurred when:
 State sales tax was paid, but not municipal tax and the goods are
  used, stored or consumed in a municipality.
   – Example: A construction company purchased construction equipment and had
     it delivered to their company location outside city limits. 4% state sales tax was
     charged by the seller.
   – Company later brought the equipment into city limits to use on a project. The
     city had a 2% municipal tax.
   – Once it is used inside city limits the additional municipal tax is due.
   – This company forgot to pay the additional municipal tax. Revenue assessed
     the company over $60,000 in municipal use tax.
                          Top 10 Errors found
                            in SD Tax Audits

1. Under-reporting of sales, use and/or excise tax due to
   poor record keeping
2. Not remitting use tax on goods and services purchased
   exempt from tax and used.
3. Not remitting use tax on items taken from inventory and
   given away free of charge.
4. Not remitting use tax on items taken from inventory for
   business or personal use.
5. Contractor not remitting use and/or excise tax on Owner
   Furnished Materials (OFM).
                            Top 10 Errors found
                              in SD Tax Audits

6. Contractor not remitting use tax on building materials
    taken from inventory and used on a construction project
    in-state or out-of-state.
7. Not remitting use tax on equipment brought in from out-
8. Exempting sales to taxable customers such as churches
    and clinics.
9. Not having valid exemption certificates on file.
10. Municipal Tax reporting errors.
                                7 Year Rule
                                SDCL 10-46-3
Use Tax due if:
• A product, not originally purchased for use in SD, is brought
  into SD for use, storage or consumption;
• That product is less than 7 years old; and
• An equivalent or greater amount of sales or use tax was not
  previously paid.

Age is determined by the manufacturer date, if unknown use the purchase date.

         All items purchased for use in SD are subject to sales or use tax.

Example: A business in Minnesota relocates to SD. They transferred equipment
from the MN plant to SD. If that equipment is less than 7 years old, use tax is due
on the fair market value at the time it is brought into SD. (Provided an equivalent
amount of tax was not paid to MN.)
                                                Statute of Limitations

SDCL 10-59-16
3 years from the date the return reporting the
   tax is filed or due - whichever is earlier.
Only assess on transactions within 3 years from
   Notice of Intent to Audit.

No limitations when:
   –   Unlicensed
   –   Fails to file a return
   –   Files a fraudulent return
   –   Fails to remit tax for a return that was filed
  Banks and Insurance Companies
       Use Tax Exemptions
Banks – taxed under SDCL 10-43-5 (bank franchise tax)
Insurance Companies – taxed under SDCL 10-44-8
  (insurance premiums tax)

               No USE TAX on services!

                But SALES TAX is due!

 Does a retailer owe use tax when they take items out of
           untaxed inventory to donate or use?
Example: Clothing store owner takes an item of clothing from
inventory for their use. Store paid $75 to wholesaler for item, but
item retails in store for $150.

         Use tax is due by owner on the store’s cost of that item,
                 therefore use tax is due on $75.
SDCL 10-46-15.4
                              SDCL 10-46-15.4

  If you charge for your service, then donate the
proceeds to an exempt organization, the charge is
               subject to sales tax.
                           Demonstration Items

• Used for demonstration only – no use tax, but sales tax
  is due when it is sold
• Used by the business – use tax due, and if the item is
  later sold sales tax is due

                                      XYZ Co.

• Samples of untaxed inventory are
  subject to use tax.
    Use Tax due by Service Providers

 Service providers: supplies used or consumed in
  providing their service are taxable.
 • Service Providers are the user or
consumer of all TPP and services they

Allowing credit for sales or use tax legally paid to another state on products
          or services towards the amount of use tax due in this state.
Credit is allowed for sales or use tax legally due and paid to another state
against the sales or use tax due SD if the other state provides for like

 Example: Backhoe purchased and picked up in Bozeman, Montana. No
 sales tax was paid to the retailer as Montana does not have a sales tax.
 Backhoe is then brought to Spearfish, SD for use in construction business.
 Use tax due SD:               6% (State 4% + Spearfish 2%)
 Tax paid MT:                  0
 Use Tax due SD:               6%

Example: Computer purchased at a store in Iowa. 5% sales tax
paid to the retailer at time of purchase. Customer picked up
computer in Iowa and brought it to Sioux Falls to use in an office.

Use tax due SD:          6% (State 4% + S Falls 2%)

Less tax paid IA:        5% (credit)

Balance due SD:          1%
                                     No Reciprocity

Example: Tax NOT legally paid: Aberdeen customer purchased
electronics online from company in Texas. Retailer charged 5%
Texas sales tax, and shipped the goods to Aberdeen. Sales tax is
due where customer receives the goods. SD tax legally due, not
Texas tax.

Use tax due SD:          6% (State 4% + Aberdeen 2%)

Tax paid TX:             5% (but will not give credit)

Balance due SD:          6%

Ask TX retailer to refund the erroneously charged TX tax.

     Examples of items subject to sales or use tax:
   Complimentary drinks & food (state and city use tax due,
    but no 1% MGR use tax on food & drink)
   Free promotional items              Kitchen equipment - stoves,
   Linens                               warmers, pots, pans, food
                                         and beverage dispensing
   Dishes or glassware
                                        Cleaning supplies
   Uniforms
                                        Menus

                                        Containers that hold take-
                                         out food – OK to purchase
                                    Office Supplies
Examples of items subject to sales or use
 Computers/Printers

 Software (anti-virus etc.)

 Furnishings

 Files/folders, Pens

 Envelopes and paper

 Printer cartridges

 Artwork

 Magazines

 Internet access

 Subscriptions to websites

 Online storage
                                                       Body Shop
Examples of items subject to sales
or use tax:

   Sand paper
   Rags
   Cleaner
   Masking tape
   Plastic
   Tools
   Equipment

 Paint – OK for resale

 These items are being used by the seller. The seller cannot purchase them for resale.
 Even if the body shop charges for the sand paper etc., it still subject to sales or
 use tax when purchased by the body shop.

Examples subject to sales or
use tax:
 Building Materials
 Owner Furnished Materials
 Supplies
 Services (engineering etc.)
 Tools
 Equipment

By statute contractors subject to contractors’ excise tax are the users
and consumers of all materials used in a project. Contractors owe
tax on all materials used by them even if given to them by an exempt entity
like a government agency.
                                           Other Services
Examples of services subject to
sales or use tax:
 Consultant
 Accountant
 Attorney
 Online Software Help Service
 Online Games

When hiring an unlicensed service provider use tax is due where the
client uses the service.

Example: An out-of-state accounting service is hired to complete tax
returns for a store in Beresford. SD state and Beresford city use tax is
due because the service is used by the store in Beresford.

• Internet
  – Forms
  – Publications
  – Tax Facts
  – Newsletters

• Municipal Tax Information Bulletin
  – City tax rates
  – Tribal Information
  – Vending/amusement/lottery chart
                                    Need Information?
Visit our Website (Business Tax)

Toll Free Number: 1-800-829-9188

Visit our Geographic Information Systems (GIS)

Email the Business Tax Division

         Check out our Quest Program (E-file)

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