Use tax is baffling for many business owners. They’re not the customer, after all, so why would they need to pay what they think of as sales tax? The problem is that sales and use tax is more about the end user, not about the difference between businesses or individuals. If you are using inventory in your business and not taking in money for it, you may need to pay use tax on the items you’re using. For example, let’s discuss an office chair manufacturer. They make pricey, popular ergonomic chairs. Often when they are trying to make a sale to an office building to supply their chairs, they’ll send out a sample chair to the business to try out.
The sample is free, a sales tactic to encourage the company to invest in the manufacturer’s ergonomic chairs for the whole building. As well as sending out samples, the manufacturers supply a lifetime warranty on the parts for the chairs included in the price of the chair, not as a separate item purchased. When a chair needs repair, the manufacturer can either send a part out to the company that bought the chairs to replace the broken part, pay for the chair to be shipped back to be repaired at their manufacturing plant, or even dispatch a repair staff member with parts to the office’s location. Of course, the manufacturer loves the chairs they make and believes they’re the best chairs on the market. Naturally, the company supplies its own office workers with chairs directly off the line. A retailer that sells the chairs also provides the chairs to office workers from their inventory.
There are different rules across the country about which of these actions trigger use tax liability. Most states do not consider free samples and items used by staff at the manufacturing plant to be subject to use tax. Items bought for resale which are later used in the company office or sent out as free samples are subject to use tax — the retailer would pay. With warranties and parts used in repairs under warranty, it gets more complex and jurisdictions have very varied laws. The idea behind use tax is that it’s levied on the party who is using the item when there isn’t a transaction. If you’re not paying any use tax, be sure to look at your liabilities and see if you should be paying use tax to ensure your company is law-abiding.