Did you know that in an audit, use tax liability is often the largest amount owed? That’s because use tax can be hard to understand — and because businesses often overlook this obligation. (That’s why it’s a common focus in manufacturing audits.)
So what exactly is use tax? Basically, it’s a tax you pay to store, use, or consume taxable property or services — when retail sales tax wasn’t paid on the purchase. For instance, say you buy something from a seller that doesn’t charge you sales tax because they don’t have nexus in your state. You still can be on the hook for tax: In this instance, it’s classified as use tax instead of sales tax.
Rules can vary across states and jurisdictions, but generally, manufacturers owe either sales or use tax on things they purchase but don’t use directly in the manufacturing process.
The fact that use tax is self-assessed means it’s easy to make mistakes, especially if the transaction in question is outside of normal procurement processes or a business has many transactions that span vendors and locations. It’s an area where auditors like to focus their attention because there’s a good chance they’ll find something — particularly if a business has been trying to manage it manually.
Avalara AvaTax for Accounts Payable helps manufacturers navigate use tax and avoid the penalties that can result from misunderstanding it. As part of our agentic AI offering, this solution takes away the confusion and provides end-to-end compliance — from calculating what you owe to filing your returns. Key features include:
Calculations that factor in the latest rules and rates, product taxability, location, and more
Liability worksheets for each return to provide oversight and visibility
Seamless integration with other solutions such as Avalara Exemption Certificate Management
A repeatable, consistent process that enhances accuracy and reduces your audit risk
