How to handle use taxes on purchases

[huddlesk]

In the US, in the state I reside, we have to pay a use tax on any purchases from suppliers in a different state (when supplier does not collect sales tax).

Therefore for some purchases, I need to add a liability for the use tax payable. My first idea was to create a tax code and apply this to line items in the purchase invoice. That caused two problems, first the invoice amount does not match the purchase amount and second the tax shows up as a decrease in the tax liability.

My bright idea, was to change the tax to a negative value and then mark the purchase invoice as tax inclusive, adjust the amount to include the tax and then apply the tax code. I thought this would create a negative tax which would adjust the purchase invoice to match the amount I’m paying and also cause an increase in the tax payable liability. However, negative tax seems to calculate as 0.00

My next plan was to add a line item to the purchase invoice for the use tax and record it as a negative amount against the tax payable account, but I’m not able to select liability accounts from the purchase invoice.

Would it be possible to allow for a negative tax rate? or to use liability accounts in the purchase invoice. I realize there are other workarounds, but they create discrepancies in the purchase invoice amount and amount paid and also don’t take advantage of the tax reports. The best I’ve come up with is to add an expense line item to the purchase invoice for the use tax amount and then when spending money, add a line item with a negative value for the tax payable account.

Any other suggestions?

[lubos]

You are right, ability to set “negative” tax rates would elegantly allow you to track “Use tax”. You seem to understand mechanics of accounting very well to come up with this solution. I’m just not sure whether this is the only solution, it really doesn’t sit right with me for some reason even though mechanically it’s correct solution.

It’s similar to concept of “tax deducted at source” used in some countries such as India, Egypt or Philippines. Manager doesn’t support TDS tax either. So I guess this is my chance to solve two issues with single solution. Let me think about this…

[huddlesk]

Thanks for considering. It is a truly great product you have.

For the the time being, I’ve settled on this approach. I created a tax code “use tax liable” at 0%. I am tagging my purchases with this code so that I can use the tax report to see all the purchases made that I have tax liability for. Then at the end of the month, I run the tax audit report, do the calculation manually and make a journal entry to increase my use tax expense and use tax payable liability. This works, but I would rather have the tax expense included as part of the expense account that the purchase was for instead of its own expense.

[lubos]

That’s why I didn’t want to propose this solution since you really want to spread “use tax expense” amount across all expense accounts proportionally where applicable.

You can still use Tax audit report to figure out use tax liability per account and then make larger journal entry debiting each account proportionally rather than using generic use tax expense account.

Of course, these are just decent workarounds. Nothing would beat automated approach where these entries would be done automatically without manual journal entries.

[isotherm]

I realize this is an old post, but I have also just tried to set a negative tax percentage to achieve tracking of use tax. Instead, the tax calculates as $0.00.

Has there been any progress made on allowing this, or a more formal solution?

[lubos]

Right now, the best way to handle this would be to create 0% tax code and two general ledger accounts in your chart of accounts.

• Under expenses: Use tax expense
• Under liabilities: Use tax payable

When you use 0% tax code on transactions, it won’t change your amounts but it will allow you to track total purchases subject to use tax.

Then once a month you should look at Tax Summary report to see your total purchases subject to 0% use tax. Let’s say it’s $1,000 USD.

If use tax is 5%, you would record journal entry to debit Use tax expense by $50 USD and credit Use tax payable by $50 USD.

[alasdair]

Any update on this. Just had the same situation, and while I can make the journal entries (and did), this means although you can see the base (amount subject to tax), the resulting use tax (being just a journal entry) doesn’t really shows as ‘tax’.

[Tut]

Can you expand a little, @alasdair? Where are you referring to seeing the base? And where does the tax not show as a tax? I am not understanding why an amount in a Use tax expense account would not obviously be a tax, much like a property tax paid. The payment itself, of course, will not be linked with the purchase invoice, because it goes directly to the tax authority, not the supplier. An example would help.

[alasdair]

I got something that worked by defining a flat rate tax code 0% rate and in this case -6% flat rate. The result was that when applied to a purchase (in this case we bought an item from a private individual and therefore had to self asses the Use tax, i.e. use tax is basically US Sales tax that we have to self assess if the supplier does not charge us) the purchase price and invoice amount remained correct (i.e. did not change for the tax) but none the less a tax liability was created for the use tax. This treated it as we wanted, treating the tax amount as non-recoverable and expensing it to the associated item expense but also creating a tax liability so that we remember to pay the tax while not incorrectly changing the supplier invoice amount payable.

Here is the result on the $8,000 purchase:

This seems like a workable solution, but was not intuitive to define. Essentially Lubo’s 0% rate idea but by adding the -6% flat rate automatically recording the liability and expense when the tax code is used rather than having to make a journal entry. In the above example the ‘inflated’ net purchase amount was expensed (Dr Expense 8,480) , the supplier trade payable recorded for the lesser ‘total purchase amount’ (Cr AP 8,000) and the tax liability recorded for the 480 (Cr Tax Liability 480).

This was exactly what I was after and all tax reports seemed to reflect things correctly.

Thanks. Hopefully this is of use to others.

[Tut]

I see problems with this, @alasdair:

1. Net purchases in the Tax Summary refers to the untaxed portion of a purchase. So it should be $8,000.
2. The negative tax rate makes the total tax on purchases wrong.
3. Flat rate tax codes are not meant to be applied to purchases at all. They implement a substitute—via sales—for the offset of VAT normally occurring on purchases. See the last topic in this Guide: https://www.manager.io/guides/8901.

You may have forced one invoice to give the results you want. But I would be very worried about how such an unorthodox procedure will play out in the long run. In particular, it is impossible to predict what these unforeseen steps will produce when the tax module gets rewritten, as the developer says is going to happen.

[alasdair]

Valid points, but until such time as there is a true use tax solution, I’m going to live with this work around. I recognize this is a conscious misuse of flat rate codes. The accounting is correct at the end of the day and as long as the tax code is added to the transaction the liability is automatically created and visible and won’t be forgotten. The settlement (payment) came out OK on the tax reconciliation. I’d rather do this for now than worry about remembering journal entries etc. Would love to see a way to define a true use tax at some point. Thanks for the feedback, I do appreciate the cautionary input and recognize this is a workaround.

[Tut]

Fair enough. Since sales taxes, let alone use taxes, are relatively uncommon around the world, I would not get my hopes up. I’d be interested in how this plays out over the long run and whether problems crop up with future software changes.