Ignorance can be bliss, but it can also be expensive. Our clients that have been subject to a Michigan use tax audit can attest to this, and those that haven’t been subject to a use tax audit would be wise to learn about their risks and how to minimize those. Here are some of the things we would advise in order to avoid a large tax bill from the State of Michigan:
- Know the basics of your industry – There are laws specific to construction companies, manufacturers, certain service providers, etc. For instance, even if a construction company doesn’t buy the materials it uses in a job, it is considered the user of those materials and can be subject to use tax on them. And manufacturers are entitled to a tax exemption for a portion of their utilities purchased.
- Educate the right people – It is not enough for the owner of the business and/or one accounting person to know the sales/use tax rules. Make sure the people engaging in the transactions subject to tax know the rules. This may be your purchasing department, when buying items across state lines; or your estimators when bidding a job with a governmental entity. For most businesses, it is too much of a burden to make one person responsible for the company’s use tax compliance.
- Get registered for use tax, and pay some tax at least annually – Depending on the auditor and his/her supervisor, you may be subject to a 10-year audit period instead of the normal 4-year audit if you are not registered for or paying use tax. Registration is as simple as checking a box. And paying can be a one time per year matter. If you think you have no tax due, be advised that I have heard that from many clients who are about to be audited, and every one of them has owed tax in the audit.
- Develop a system for tracking non-taxed purchases – There is too much complexity in the law to expect that you will capture every transaction that should have use tax assessed on it, but that doesn’t mean you shouldn’t try to at least capture some transactions. At the very least, you should identify major non-Michigan vendors you purchase from and, if they are not charging you sales tax, track those purchases so you can self-assess use tax on them.
- Keep your business and your personal separate – On top of the other problems with running personal expenses through your business (IRS audit exposure, reduces value of your business, possible piercing of the corporate veil), having the company pay for personal expenses makes those purchases much more likely to be subject to a use tax audit. While the use tax is applicable to individuals too, the audit rate for individuals is a very small fraction of the audit rate for companies, especially in the construction and manufacturing industries.
- Save records of your fixed asset purchases – In every use tax audit, you will need to show the auditor that you paid sales tax on the equipment you bought over the past four years (10 years if you aren’t registered for and/or paying use tax). If you don’t have purchase documentation, the assumption is that no tax was paid, so make sure to save those invoices in a special place.
- Call your accountant – Unsure of whether you should pay sales/use tax on shipping? What about a construction project for a church? Are there any tax exemptions for safety equipment? And what about if you are renting equipment from a related entity? Guess who has the answer to all those questions and many more.
The good news is that Willis & Jurasek can help you with all of the above issues. We can help you put procedures in place to lessen your risk going forward, help you “come clean” with the state at a reduced cost on past sins, or represent you in a tax audit. Don’t let tax ignorance and a big bill from the state ruin your bliss. Call Willis & Jurasek today to schedule an appointment to discuss your use tax issues.