GP Controller Series: Addressing Use Tax

Use or Purchase Tax is a self-assessed tax where goods are purchases without taxes applied and the user/company is required to self-assess and remit taxes.     This most often happens with inventory items that are used by the company instead of being sold to customers or with items purchased from suppliers or via jurisdictions not subject to tax. This comes up just enough and is a big enough pain, that I wanted to cover it.

Quick examples, if a grocery store takes bleach for sale of a shelf to help clean up a spill, they owe tax on that. Also, if a US company orders hard drives from a supplier in China to repair some internally used computers, the Chinese supplier has no requirement to collect and remit US tax. Instead, the buyer would be required to remit tax payments to their state.

GP has a small handful of ways to deal with use tax depending on the details, but one option stands out: Negative Tax Rates.

In GP, a Tax Schedule is a collection of Tax Details. A Tax Detail holds the specifics for a single tax rate. For example, Florida has a state sales tax rate and a different county tax rates. Each of those represents a Tax Detail. Those details get combined into a schedule and a schedule is applied to a transaction. So a 7.5% tax from a schedule might be a combination of a 6% state tax, 1% county tax, and .5% city tax.

If tax is included in an invoice, the customer pays both the invoice and the tax to the vendor. In a use tax case, the vendor gets the invoice amount and the taxing authority gets the tax amount. This is what adds a layer of complexity to the process.

GP allows Tax Details to be both positive and negative and each DETAIL can have a separate account so we can use this to create Tax Schedules for use tax. Simply create new tax details that mirror the tax rates with negative rate values. Combine both the positive and the negative rates into a single tax detail.

Now, when this rate is applied to a transaction, the net tax value on the transaction is zero, so the vendor is paid correctly. The positive rates debit an account, usually, an expense account for the tax, and the negative rates credit a liability to the taxing authority to collect those amounts all in one place.

There are some technical setup items to complete, but this is the most straightforward solution. You can find additional details in this free, Use Tax whitepaper.

Links to all the posts in this series can be found at http://mpolino.com/gp/gp-controller-series-index/

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