Major change to D.C. tax code: Employers to pay use tax

There’s a sales tax. There’s a use tax. One is ubiquitous. The other is oft-avoided and virtually unknown.

That’s soon to change. As of Oct. 1, the start of fiscal 2013, the D.C. Office of Tax and Revenue will shut the door on a gaping use tax loophole, capturing more than $2 million a year in new revenue and likely causing consternation and confusion for 1,000-plus city businesses.

The District’s sales tax, tacked onto the cost of most tangible personal property and a handful of services, ranges from 6 to 18 percent. Businesses that collect the tax are required to file sales tax returns quarterly or annually, depending on how much they take in.

But what of the use tax?

Like the base sales tax rate, D.C.’s use tax also is 6 percent. It is imposed on items purchased outside of D.C. and then brought into D.C. to be used, stored or consumed, provided the purchaser didn’t pay sales tax on the item to one of the states.

In other words, the use tax is essentially a sales tax for items bought elsewhere, tax free and likely online — or in a tax-free state.

The sales and use tax has long been interchangeable. Only businesses that file a sales tax return with the D.C. tax office are required to file a use tax return. Meaning, many District businesses enjoy freedom from the use tax.

Kiss that freedom goodbye.

Tucked away in the fiscal 2013 budget is a provision requiring all D.C. employers who are not required to collect and remit sales tax to file an annual use tax return. The CFO expects the District will reap $2.2 million a year with the budget provision.

So let’s say a small business owner tries save a few dollars by traveling up Interstate 95 to purchase new computers in Delaware, a state without a sales tax. To deduct the cost of the computers without paying the use tax, under the new law, risks an OTR audit.

“Currently, companies are only able to file use tax through the District’s sales tax program,” the Office of the Chief Financial Officer explained in its budget fiscal impact statement. “This will provide a mechanism for companies without sales tax liability to pay the use tax they owe on purchases made outside the District for goods and services used in the District.”

OTR is expected to mail 1,200 booklets to those businesses it expects will be subject to the use tax provision, a tax office spokeswoman said. Returns are due by Oct. 20, less than one month from now.

The D.C. Council’s finance and revenue committee suggested in its budget report that the council reject the proposed subtitle. The problem, as the committee noted, is that the “funds are not available within the committee to pay for this disapproval.” It suggested the full council find the money. That didn’t happen.

“In recent years, we have compounded the difficulties placed on small businesses by the economic downturn by also increasing taxes and fees,” the committee wrote in its report. “This adds a substantial new burden for small businesses for the sake of raising a very small amount of money.”

One could argue that $2.2 million is not a “very small amount of money.” On the other hand, this change will certainly be seen, fair or not, as a burden on employers — exactly what the District, and its reputation as a miserable place to do business, doesn’t need.

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