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Considerations for Self-Assessing Tax on Purchases

USA
2 Feb 2012

Sales and use tax compliance is not a simple process. In the United States, there are over 11,000 taxing authorities with constantly changing sales tax rates and laws. The rules and regulations for each taxing jurisdiction are slightly different from the next, resulting in mounting complexities when it comes to compliance. With respect to purchases of products and services, the vast majority of companies rely on their vendors to assess any applicable sales taxes due on a particular transaction. Taxand US analyses the considerations to be taken into account as a company evaluates whether it should self-assess tax on purchases of products and services.

Direct Payment of Use Taxes - the Benefits

In most jurisdictions, a company must obtain approval to "direct pay" taxes to the jurisdiction. Some jurisdictions require a company to demonstrate its ability to fulfill several qualifications imposed by the jurisdiction. Once the company obtains approval to direct pay use taxes on its taxable purchases, the company may issue a direct payment exemption certificate to a vendor for the purchase of taxable items and services that are purchased for its own use and that will not be resold. The primary advantages of obtaining a direct payment permit are as follows:

  • Companies have direct control over the payment of taxes
  • A company can control the timing of tax paid on items purchased
  • In some states, a company can maintain a tax-free inventory so tax is not paid on items that are ultimately used in another state
  • Local tax savings - for instance, in Texas, local taxes are based on the location where a taxable item is first used. Therefore, local taxes may not be due on purchases shipped outside a local taxing jurisdiction for first use

Taxand US discusses the issue of self-assessment on purchases in more detail

Taxand's Take


As you can see, several important considerations must be taken into account as a company evaluates whether it should self-assess tax on purchases of products and services. At a minimum, each company must carefully evaluate its business operations, the history of its compliance function and the costs associated with implementing such a process.

Your Taxand contact for further queries is:
Craig Beaty
T. + 1 713 221 3933
E. cbeaty@alvarezandmarsal.com

Taxand's Take Author