Doing business: Things Known and Unknown

[elfs]

Last night, I had a lovely time at a geek event, but afterward I had a conversation with one of the participants, and we had an interesting exchange of knowledge about being men of small business.

I learned two things that surprised me. The first was that he did not know what an encumbrance was. In accounting, an encumbrance is a forward-looking entry in your ledger indicating money that you are obliged, with contingency, to pay sometime in the future. In Quicken, for example, all "scheduled transactions after today" are encumbrances. Quicken will show you how much money you will (or won't) have three months down the line if all of your scheduled income and payments go as scheduled. Contingencies are things like: you sell your car and have no more car payments, or you lose your job and have no more income.

In a project I have, customers can launch long-running processes. We create an encumbrance to their account. Whenever someone enquires as to how much credit the customer has left, unless a flag is passed in the response is the credits minus all encumbrances. This prevents overspending. If the long-running process succeeds, the encumbrance is committed and the account debited; if it fails, the encumbrance is cancelled. So he learned something.

I learned that Washington State applies sales tax on everything you buy out of state. Everything. If the state you bought it from has a sales tax, you must pay the difference to the Washington state treasury. There is no refund if the other state's sales tax is higher. This is not optional. It applies to Internet purchases. It's called a use tax.

If you're an Internet business in Washington, and your servers are in another state, you must pay the "use tax" on those servers. If you buy a bag of peanuts in New Orleans but don't eat them until you're in Washington state, you owe the Washington State Department of Revenue 1.5% of the cost of the bag (Louisiana has a 4% sales tax, compared to Washington's 6.5%):

Use tax is a tax on the use of goods or certain services in Washington when sales tax has not been paid. Goods used in this state are subject to either sales or use tax, but not both. Thus, the use tax compensates when sales tax has not been paid. Use tax is due at the rate where you first use the article, not where the sale takes place.

Note that this puts the burden of accounting for use tax on the purchaser, not the seller. No wonder it's usually only applied to businesses, but that's selective enforcement.

Comments

[omahas.livejournal.com]

The Washington State "use tax" is a joke. Placing the burden on the purchaser means that the state actually has to enforce it. Which means that the state has to actually get the information for *each and every purchase made in and out of state that doesn't have a sales tax*.

You can imagine how often that is done.

It is such a joke that even non-Washington State Internet sellers don't have the use tax on their site when people purchase from Washington State (most probably don't even know it exists).

[shunra.livejournal.com]

There are attempts to enforce it on small businesses operating in WA. I got a letter from the dept. of revenue asking politely that I state the amount of use tax that I owe.

Since - in my line of business - there is very little purchasing of any kind of goods, and what there is gets taxed because every online company I deal with has business presence in WA, I sent them back an equally polite letter stating the amount of use tax I owe to be nonexistent.

[blaisepascal]

The use tax is probably not all that uncommon. Technically, New York State has a use tax as well with similar rules, but enforcement is likewise lax.

[yamazakikun.livejournal.com]

Audits of individual taxpayers for use tax just don't have enough money in them. Businesses have B&O tax and sales tax (collected).

[anthony albert (from livejournal.com)]

Maine also has a "use tax" rule, and State of Maine residents are supposed to pay a tax on purchases made out-of-state. The rate is the Maine state sales tax rate, minus the tax rate of the locality where the good or services are purchased.

Maine (along with a number of other states) allows individuals to pay this yearly, by declaring it on their state income tax form. If you wish, you can use the "estimated use tax" table, which generally amounts to a couple of extra dollars of taxes, based on your income. This is, to me, well worth it for the legal coverage that it gives, for the price of a few extra bucks going to the state.

In short, it's a way for the state to try to grab a few extra tax dollars, since otherwise, you are getting something for free by purchasing it out of state.

Since this is becoming utterly ridiculous in this day and age, there have been numerous attempts to produce a 'simplified inter-state sales tax', but so far, none of them have come to fruition.