COVID Resources

Use Tax Compliance for Business Owners

Business owners pay many different kinds of taxes every year. Of those taxes, sales tax is probably the easiest to understand. If a business owner buys $100 in dental supplies and the tax rate is 10%, then the business owner pays an extra $10 to cover the tax. The vendor collects and pays the sales tax.

However, if the vendor fails to collect the sales tax on a purchase, the business owner still owes the money in the form of use tax. The use tax rate is the same as the business owner’s local sales tax rate and failure to comply could result in penalties and interest.

Most in-state vendors know the tax rules and collect the correct amount of sales tax on any purchases. Unfortunately, out-of-state and online vendors are less reliable. Unless a business owner thoroughly examines every invoice for tax compliance, he may have use tax liability he didn’t know about. To make matters worse, state and local tax examiners generally look back six years to determine compliance, which means that, if even a single vendor fails to collect the right tax, the business owner could be stuck with very large tax bill.

What should you,  a business owner, do to figure out if you are use tax compliant?

  • First, review your vendor list and pull all invoices for out-of-state and online vendors for the last year.
  • Next, examine those invoices to verify that the vendor is charging the correct percentage of sales tax. If you are unsure of the tax rate that applies to you, you can find use tax rates for each Alabama jurisdiction on the Alabama Department of Revenue’s website.
  • If something looks incorrect or you are unable to determine whether your vendor is correctly charging you, call the vendor’s accounts receivable department for clarification.

If you find that you are not paying sales tax on certain items, you need to register and file use tax returns each month (even in months where you have no tax liability). There are generally three levels of use tax – city, county and state – and it is important that you are filing with all three. Thankfully, Alabama has a single source filing and paying system known as ONE SPOT that makes the process relatively easy.

If you need any guidance on use tax compliance, please feel free to call our office at (205) 871-1880.