State Use Tax: A Growing Concern for Financial Institutions

Adam Aucoin, Manager, and Merrill Barter, Director, Tax Practice

In recent years the topic of “use tax” and the potential exposure for financial institutions have become more important. Failure to properly account for and report use tax can result in significant tax liabilities upon audit. Two of the primary causes of the underreporting of use taxes and related audit issues are:

  1. A lack of familiarity with and misunderstanding of the use tax laws - what is and is not subject to use tax.
  2. Missing or improper records and documentation of purchases.

To limit the use tax exposure, it helps to have an understanding of the use tax laws, their specific applicability to financial institutions, and what can be done to mitigate the chances of owing additional use tax.

The Use Tax in General

Use tax is a companion tax to the sales tax, and is imposed on purchases of taxable property or services to be used or consumed within the state. The use tax must be “self-assessed” by the buyer when taxable purchases are made from a seller that does not charge sales tax (may be located outside of the state in which the financial institution is located). For example: a bank is located in Maine and buys equipment to be used in Maine from a vendor in New Hampshire. If the vendor does not charge Maine sales tax on the purchase, then Maine use tax must be accrued and remitted to the State on the purchase. Use tax on purchases of equipment and most other tangible goods can appear to be fairly straightforward, but what about use tax on reports, or on software - which although it is an “intangible” asset, is treated as tangible personal property for sales/use tax purposes? The lines can start becoming a little more blurred with regard to the sales/use tax treatment of these items, and the laws vary from state to state. Use tax could potentially be due for any “canned” software whether bought “off the shelf,” downloaded directly to a computer or accessed remotely.

The Use Tax and Financial Institutions

The applicability of use tax to financial institutions is much the same as for other entities, but there are certain potential problem areas that often come up during use tax audits. The following examples illustrate some potential use tax “problem areas” that could apply in your state:

 

Example A:

Bank of The County decides to do a build-out of its headquarters in Caribou, Maine. They purchase ATM machines from a New Hampshire vendor who does not collect sales tax on the machines. Bank of The County would be liable for use tax on the ATM machines.

Example B:

Bailey Bros. Building & Loan (Happy Holidays!) purchased new furniture for its Burlington, Vermont main office (editorial license - sorry, Bedford Falls!). It was purchased by an employee using a P- Card (purchase card) from a furniture store in New Hampshire. No sales tax was paid at the time of purchase. Bailey Brothers would be liable for Vermont use tax on this purchase.

Example C:

A software package called “Super-Duper Banking Software” is paid for and downloaded by the Massachusetts financial institution Banks “R” Us. The invoice for the software does not include sales tax. The Commonwealth of Massachusetts would consider this software purchase to be subject to sales/use tax and because sales tax was not collected by the vendor, Banks “R” Us would be liable for use tax on the purchase.

Example D:

Banks “R” Us works with a vendor who provides the bank with benchmark reports in hard copy. These reports could potentially provide the same value and information to both Banks “R” Us and to its competitors. Therefore under Massachusetts law, these reports would be subject to sales tax. Again if no sales tax is collected by the vendor, then Banks “R” Us would be liable for use tax.

Example E:

Assume the same information as Example D but instead of benchmarking reports, the bank uses a vendor to produce reports related to its financial statements. These reports would not be subject to sales tax because the report is for internal use only and created specifically for the bank. In Massachusetts, the sale of information that is specific to the purchaser and may not be used by other individuals is exempt.

Mitigating Use Tax Exposure

While a use tax audit is never pleasant, it doesn’t have to be an expensive experience. There are ways to help mitigate the financial institution’s use tax exposure, including:

  1. Properly register for use tax in any state where the entity has a physical location and may make taxable purchases.
  2. Review invoices, particularly those from new vendors and vendors from outside the state, to make sure sales tax was properly charged by the vendor.
  3. Review software purchases and related maintenance agreements to ensure that they have been treated properly for sales/use tax purposes.
  4. DOCUMENT, DOCUMENT, and DOCUMENT. All purchase invoices should be kept and organized. Sales tax may be paid on an item when it is purchased, but if the invoice is not produced during an audit, use tax may be owed on this same purchase.

Conclusion

Use tax can be complex, and is an area of potentially significant exposure for financial institutions. Becoming familiar with the use tax laws in the states in which an entity has physical locations, proactively monitoring the sales tax treatment of purchases, initiating a process for accruing and remitting use tax when appropriate, and maintaining good records will help to mitigate a financial institution’s use tax exposure.

If you would like to discuss these matters further, please contact Merrill Barter or your BNN professional.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.