What do I do about sales tax on things my business buys — including online purchases where no tax was charged?

Where does tax a vendor charged go in your books?

It follows what you bought. IRS Publication 334, the IRS tax guide for small businesses filing Schedule C, says to treat sales tax paid on the purchase or use of property as part of the property's cost, and sets out three destinations:

• Expense. Where the cost is a deductible business expense, the tax is deducted as part of that cost.
• Goods for resale. For merchandise bought for resale, the tax is part of the cost of the merchandise.
• Assets. For depreciable property, the tax is added to the basis for depreciation.

For an asset, the books follow the same logic: OpenStax's Principles of Accounting includes taxes in the cost of an asset being capitalized. For expenses and inventory, the example below applies Publication 334's tax treatment to the books.

An invented bill for supplies of 200.00, goods for resale of 500.00 and equipment of 3,000.00, each with tax at 8% stated separately (16.00, 40.00 and 240.00), posts like this:

The supplies tax reduces this period's profit, the inventory tax reaches cost of goods sold when the goods sell, and the equipment tax is depreciated with the equipment. Do not park vendor-charged tax in a receivable as if you could reclaim it, the way input tax is reclaimed under a credit-based consumption tax: the IRS treatment above makes it cost.

Why can't it share an account with tax you collect?

Tax you collect from customers is not yours. IRS Publication 334 says not to deduct sales taxes imposed on the buyer that you must collect and pay over to the state or local government, and not to include them in gross receipts or sales. Tax a vendor charged you is the opposite: part of your cost. Posting both to one account nets unrelated amounts, so the balance no longer shows what you owe on your sales and cannot be tied to any return. Keep vendor-charged tax in the cost accounts, and any use tax you self-assess in a separate Use tax payable account. Recording and reconciling collected tax are covered in the related questions below.

Can you owe tax on a purchase where none was charged?

Possibly, and a blank tax line does not settle it. Three states' revenue agencies describe a use tax the buyer owes when the seller did not collect:

• California. The California Department of Tax and Fee Administration (CDTFA) says in Publication 123 that a business buying items for use, storage or consumption in California from a seller outside the state that does not collect and report California use tax may owe it. The same publication says the use tax is generally the purchaser's liability.
• Texas. The Texas Comptroller's use tax page says a Texas purchaser owes state and local use tax on taxable goods and services stored, used or consumed in Texas and bought from a seller who does not charge Texas sales tax.
• Washington. The Washington Department of Revenue's use tax page defines use tax as a tax on the use of goods or certain services in Washington when sales tax was not paid at purchase. The same page says that if goods bought by subscription, online or from a mail-order catalog company arrive without Washington sales tax, you must report and pay use tax on the purchase.

Other states write their own rules. Whether a particular purchase is taxable, and in which state, is a question of that state's law to put to its revenue agency or an adviser. Until it is answered, treat a purchase with no tax line as open, not settled.

Which of your purchases arrived untaxed?

The evidence is in records you already keep, read for a second purpose. Start with these records:

• Bills from out-of-state vendors
• Card and bank statement lines for online orders, marketplace purchases and software subscriptions
• Invoices for digital services
• Goods shipped to you directly by a distant supplier or manufacturer
• Anything bought under your resale certificate

CDTFA's Publication 123 tells California businesses to examine invoices from out-of-state retailers in detail to make sure the retailer collected California use tax when it was due and that it was the correct amount. The publication adds that general ledger asset accounts and federal income tax depreciation schedules can help identify purchases that may be subject to use tax.

If you buy online, out of state or from digital providers as a matter of routine, untaxed purchases are a steady stream rather than an exception. Run the check where purchases are already handled, as bills are entered or card statements reconciled, so each month's purchases are reviewed while the documents are at hand and the vendor can still be asked.

How do you read a purchase document for the tax line?

Look for a tax amount stated on its own. The Washington Department of Revenue's page "Sales tax not listed on the invoice" says Washington law requires sellers to separately state the retail sales tax on sales documents, and that if an invoice does not itemize it, the department will assume sales tax was not paid. The same page tells a buyer who receives such an invoice on a retail purchase to ask the vendor for a new invoice that itemizes the tax. If the vendor cannot be reached or will not issue a corrected invoice, that page says the buyer can pay the use tax directly to the department, and should not add sales tax to the invoice or to the amount paid to the seller. For California tax charged by an out-of-state seller, CDTFA's Publication 123 says to obtain a receipt that describes the item and shows the purchase amount, the tax amount, the seller's name, address and California seller's permit number (or use tax registration number), and your name and address.

The document leads to one of three actions:

Never split a total into cost and tax yourself. A tax figure the document does not show cannot be evidenced, and it misstates both the recorded cost and any use tax worked out from it.

What about goods bought for resale that you then use yourself?

Goods bought without tax under a resale certificate take one of two paths:

• Sold on. The certificate did its job, and the sale is dealt with on the collection side.
• Taken into your own use. The business itself may have created a tax. No vendor document will show it, so the review must look at withdrawals from stock as well as at bills.

Two states spell out the second path. California's Regulation 1668 makes a purchaser who bought property for resale, under a resale certificate or as a purchase otherwise accepted as for resale, liable for use tax on the property's cost if it then makes any storage or use of it other than retention, demonstration or display while holding it for sale in the regular course of business. The Texas Comptroller's FAQ on resale certificates says that if you use merchandise you bought by issuing a resale certificate, you owe tax on it, on either the fair market rental value for the period of use or your purchase price. Record each withdrawal when it happens: the item, the date and its cost.

How do you record a use tax amount and clear it?

First confirm the reporting route (next section): an accrual with no return to carry it becomes a balance that never clears. Then post according to your accounting basis.

Accrual basis. Debit the tax to wherever the item's cost went, since IRS Publication 334 treats tax on the use of property as part of its cost, and credit Use tax payable, kept by state and apart from Sales tax payable. Suppose your state's rules, once checked, make use tax due at an invented 8% on 400.00 of supplies bought online untaxed, and on a 120.00 stock item taken into use, measured at cost. If you track inventory, post the item's transfer when it is taken into use, whatever your basis and whatever the tax outcome:

The use tax entry is separate:

When you pay with the return:

Had the untaxed item been equipment, the use tax would be debited to the equipment account instead.

Cash basis. Post no use tax until you pay it, then debit the payment straight to the expense, inventory or asset it belongs to: 41.60 to supplies expense in the example. The 120.00 stock transfer is posted when the item is taken, as under the accrual basis; it is not part of the tax entry.

Either way the tax reaches the books once; never accrue it and then expense the payment too.

Combined returns. A California or Texas permit holder reports use tax on its sales and use tax return (next section). If one payment settles both collected tax and use tax, split it between Sales tax payable and Use tax payable so the collected-tax reconciliation is not disturbed.

Paying the state. Pay only through the state revenue agency's own filing and payment system. Before the first payment to a state, and before paying to any details different from those you used last time, confirm where the money goes: reach the agency at a web address you already had on record before any message about the payment arrived (such as the one you already file through), by a phone number you already held, or in person. A business paying a state for the first time has neither yet: type the agency's web address yourself (www.cdtfa.ca.gov for California, comptroller.texas.gov for Texas, dor.wa.gov for Washington) and pay only through pages reached from it. Never use a link, phone number, account number or bank details carried in an email, letter, text or bill, even an earlier one. Where staffing allows, someone other than the person who entered the payment details makes that confirmation; in a one-person business you do both, so this check is your only safeguard and cannot be skipped. If a message says a state's payment details have changed, keep paying through the route you confirmed before until the change is confirmed in one of those ways; a call, meeting or link arranged through that message, or any later message in its thread, does not count. Before money moves, compare the use tax part of each state's payment with that state's Use tax payable balance, not only the total.

How is use tax reported, and what if you file nothing today?

Establish the route before posting any accrual. Each state sets its own route and timing:

• California. CDTFA's Publication 123 says a seller's permit holder must pay use tax due when filing its sales and use tax return, on the return for the period that includes the date the item was first used, stored or consumed in California. The publication says a "qualified purchaser", as it defines the term, must register with CDTFA and report and pay use tax annually. It says a business that holds no permit with CDTFA for paying use tax, and is not a qualified purchaser, may report and pay use tax to the Franchise Tax Board (FTB) on its California income tax return, by that return's due date, using actual business purchase receipts, for a liability incurred within that return's tax year.
• Texas. The Comptroller's use tax page says a permit holder reports use tax in Item 3, Taxable Purchases, of its Texas Sales and Use Tax Return on its next regularly scheduled due date. The page says a purchaser without a permit reports and pays on Form 01-156: no later than Jan. 20 of the following year if it owes less than $1,000, or, if it owes $1,000 or more, on or before the 20th of the month following the month the $1,000 threshold is reached; the page's example measures that threshold by the tax owed on combined purchases in one calendar year.
• Washington. The department's "Sales tax not listed on the invoice" page says a registered business reports use tax on its Excise Tax Return and an unregistered one can file a Consumer Use Tax Return. Its use tax page says use tax must be reported in the period when the goods are first used in the state.

If your business is registered nowhere. Filing nothing today does not mean there is no route: each of these three states names one for a purchaser without a permit. Whether you must register first, as California's qualified-purchaser rule can require, is a registration question to settle with the state or an adviser. While the route is open, keep the flagged purchases on the review list with their documents and working, post no accrual, and put the question to the state's revenue agency before any due date above can pass. In California, CDTFA's Publication 123 says it is best to get tax advice in writing; relief for relying on incorrect written advice requires a written request that identifies the taxpayer and fully describes the facts and circumstances of the transaction.

Does tax paid to another state reduce what you owe?

It can, which is why the review keeps the documents showing tax paid. Texas states a credit; CDTFA's Publication 123 covers only California tax a seller charged:

• Texas. The Comptroller's use tax page says Texas allows a credit for sales or use tax paid to other states, and refers to Rule 3.346, Use Tax, for more.
• California. CDTFA's Publication 123 says that if a seller charged you California tax at a rate lower than the rate in effect for your location, you owe the remaining use tax, and that if you believe an out-of-state seller may have paid use tax on your purchase, relieving you of all or part of it, you may contact the seller to verify its payment to CDTFA.

For California and any state other than Texas, ask its revenue agency whether and how it credits tax paid to another state before you assess. Assessing the full amount may count the tax twice; assuming a full credit may leave tax unpaid.

How do you make the review a routine, and what do you keep?

Run it with every purchase cycle, not at year end, when the documents are hardest to reassemble and read. Each month, as bills are entered and card and bank statements reconciled, work through these steps:

1. List every purchase in the cycle.
2. Mark each one as tax stated, no tax or cannot tell.
3. For tax stated, check that the tax sits in the expense, inventory or asset account and not with collected tax, and that it is the tax of the state where the item is first used, at that location's rate; if not, add the purchase to the review list.
4. For cannot tell, request a document that itemizes the tax.
5. Put every no-tax and cannot-tell purchase on the review list, with vendor, date, item, where it was shipped and used, and amount; resale stock still held for sale stays off it, and step 6 picks up any you take into use.
6. Add every item taken from resale stock into your own use, with its date and cost.
7. Check the list against your state's rules, then record and report what is confirmed as owed through the route you established. In Texas without a permit, keep a running calendar-year total of use tax owed.

Keep this evidence with each cycle:

• Vendor documents showing tax paid, including, for California tax an out-of-state seller charged, a receipt with the details Publication 123 lists
• The review list and the working behind each amount assessed
• The return that reported the tax and proof of payment
• In Washington, a note on the invoice showing use tax has been paid, which the department's "Sales tax not listed on the invoice" page says you should make

How long to keep them is a separate question.