Use Tax / Nov. 2011

1. Use Tax / Nov. 2011 Department of Revenue

2. Use Tax 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 rate. • 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)

3. Use Tax • 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.

4. Majority of the Audit Assessments are Use Tax Use Tax applies where the customer uses, stores or consumes the goods or services.

5. 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

6. 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 state. The purchase of promotional items. Service providers purchase of items used to provide the service. Use Tax

7. 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. Use Tax

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

9. Top 10 Errors found in SD Tax Audits • Contractor not remitting use tax on building materials taken from inventory and used on a construction project in-state or out-of-state. • Not remitting use tax on equipment brought in from out-of-state. • Exempting sales to taxable customers such as churches and clinics. • Not having valid exemption certificates on file. • Municipal Tax reporting errors.

10. 7 Year RuleSDCL 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.)

11. 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

12. 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!

13. Inventory 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.

14. Donations SDCL 10-46-15.4 If donated to taxable entity, sales/use tax due on cost of item donated Donation of untaxed inventory Taxability depends on the entity receiving the donation! No use tax due if donated to tax exempt entity approved by DRR You will need documentation

15. Donations SDCL 10-46-15.4 Providing a free service is not subject to use tax Donation of services/labor If you charge for your service, then donate the proceeds to an exempt organization, the charge is subject to sales tax.

16. 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 Records of XYZ Co.

17. Samples • Samples of untaxed inventory are subject to use tax.

18. Use Tax due by Service Providers Service providers: supplies used or consumed in providing their service are taxable.

19. Service Providers • Service Providers are the user or consumer of all TPP and services they purchase.

20. Reciprocity 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.

21. Reciprocity 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 credit. 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%

22. Reciprocity • 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%

23. 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.

24. Restaurant/Bar • 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 • Linens • Dishes or glassware • Uniforms • Kitchen equipment - stoves, warmers, pots, pans, food and beverage dispensing • Cleaning supplies • Menus • Containers that hold take-out food – OK to purchase resale

25. Office Supplies • Examples of items subject to sales or use tax: • Computers/Printers • Software (anti-virus etc.) • Furnishings • Files/folders, Pens • Envelopes and paper • Printer cartridges • Artwork • Magazines • Internet access • Subscriptions to websites • Online storage

26. 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.

27. Contractor • 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.

28. 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.

29. Sources • Internet • Forms • Publications • Tax Facts • Newsletters • Municipal Tax Information Bulletin • City tax rates • Tribal Information • Vending/amusement/lottery chart

30. Questions?Need Information? • Visit our Website (Business Tax) • www.state.sd.us/drr2 • Toll Free Number: 1-800-829-9188 • Visit our Geographic Information Systems (GIS) • http://www.state.sd.us/drr2/GIS/index.htm • Email the Business Tax Division • bustax@state.sd.us • Check out our Quest Program (E-file)