It’s tax season. We are reminded of the depths to which tax permeates our lives. In addition to Federal & State income taxes, consumers pay taxes on air transportation, cigarettes, driving, hunting, fishing, food & beverage, gasoline, inheritance, libraries, liquor, marriage, real estate, passports, and utilities, and on and on. As a business owner, there is another can of tax worms we open - corporate, personal property, payroll, and business registration taxes are a few examples. One tax that has been the focus in the dental practice over the past few years, as internet sales have risen, is the sales & use tax.
What is Sales & Use Tax?
When you purchase an item for the practice - let’s say a new pair of loupes - from your favorite local distributor, you will pay the local sales tax that is roughly 4-7%, depending on your state (you may also be required to pay city sales tax). What if you found a great deal on the internet for those loupes from a company in Florida? That manufacture will likely not be required to charge you the sales tax because they do not have a “physical presence” in your state. Now the responsibility to report these non-taxed transactions lies on your shoulders as the owner of your dental practice. This is the “Use Tax”.
How do I comply?
Your practice is required to file monthly, quarterly, or annually the form to report your Use Tax transactions. You will report the total of purchases which sales tax was not paid - and pay the tax. We recommend you review all invoices/statements from vendors to determine who isn’t charging you the appropriate sales tax. Then, call them to request they start charging you sales tax - this will shift the compliance burden to your vendors. If they will not or are not required to, you must track the transactions & report to your state/city to pay the use taxes.
Why is this a big deal?
States are looking at all avenues to collect more money as they struggle to keep their budgets afloat. This Sales and Use tax is “low hanging fruit” - a pretty easy target for them to pick on as internet sales have skyrocketed and most dentists aren’t aware they must pay this tax.
I understand this is an area of opportunity to save some significant cash and the financial impact to your practice depends on how much you order over the internet. Let’s take just dental supplies for example. For a $1mm practice with a generous 8% supply budget, that is $80,000 of dental supplies with $5,600 sales tax at a 7% sales tax rate.
With over hundreds of thousands of practicing dental owners nationally, you can understand why each state is interested in collecting as much sales & use tax revenue as they can from the dental industry. Pay attention to this and include it in your quarterly review with your CPA. If you are not getting monthly reconciliation of your bookkeeping and proactive reporting on your dental practice performance, consider a dental specific CPA – it could make all the difference.
For your own “accounting checkup”, visit Crossroads Tax Advisors to determine how a dental CPA might impact your dental practice. To get started with the Crossroads Tax Advisors online consultation – a custom evaluation of your own practice opportunities - click here - How would a Dental CPA impact your practice?