Kristina's Bookkeeping Blog

What is Use Tax, and when should I be paying it?

Often ignored, either accidentally or intentionally, use tax is an important part of your company’s bookkeeping. At the most basic level Washington State Use Tax can be described as:

Use Tax – Tax paid on goods and services subject to Sales Tax, when Sales Tax has not been paid.

What this mean is that use tax is paid when sales tax should have been collected, but wasn’t. Most often, this results from:

Out of state purchases

As a Washington State business owner, if you purchase goods in a state without sales tax, such as Oregon, you are required to pay use tax on those goods. If you purchase goods in a state that collects sales tax, but at a lower rate than Washington, you will only pay the difference.

Craigslist, etc.

This doesn’t apply to Craigslist exclusively, but any purchase of goods from someone who does not or cannot collect sales tax. So if you bought office furniture from a listing on Craigslist, or from the company moving out down the hall, you owe use tax.

Online Purchases

Although more and more online stores collect the appropriate sales tax on their goods, some still do not. Pay attention to purchases from websites like Amazon Marketplace. If you buy directly from Amazon, they usually collect sales tax, independent merchants generally do not. Ultimately, if you purchase goods online and the seller does not collect sales tax, you are required to pay use tax on those purchases.

Digital Products

Consider this an important sub-section of online purchases. This category is often the hardest for owners trying to do their own bookkeeping. As digital products continue to evolve, it can be difficult to pin down what is a taxable good and what is a service. The Washington State Department of Revenue describes digital products subject to tax as:

  • Digital goods
    • If you have electronically transferred data, information, music, movies, or pictures, it is a digital good. This is NOT limited to goods you’ve purchased, but also includes streaming or temporarily licensed goods.
  • Digital Automated Services (DAS)
    • Examples of DAS provided by the Washington State DoR include:
      • Photo sharing services.
      • Car history report services.
      • Online searchable databases
  • Remote Access Software (RAS)
    • This effectively covers “Cloud Computing” services. Does your company pay a monthly subscription for online productivity tools? These kinds of purchases or subscriptions are subject to sales tax. Often cloud service providers do not collect the required sales tax, in which case it is the buyer or subscriber’s responsibility to pay use tax.

Calculating your use tax rate isn’t very hard, it is the same as your sales tax rate (unless you have paid partial sales tax in another state and use tax is only making up the difference). The hardest part is being aware of when sales tax should be collected. As physical and digital goods are increasingly purchased online states are paying much closer attention to use tax revenue. As a result, it is important for bookkeepers and business owners to understand when it is and is not applicable.

If you are unsure how the Washington State Department of Revenue will rule on a particular transaction, ask them! Their Tax Ruling Form is a great resource for any tax issue, not just use tax.

Finally, if you feel that your business is ready for experienced help with your bookkeeping, contact Kristina’s Abacus today!

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