Important Things to Know About Use Tax
According to the South Dakota Department of Revenue, use tax is the counterpart of the South Dakota sales tax. The two taxes apply to the sales of the same products and services, have the same tax rates, and have similar laws. The difference is in how the taxes are applied. Use tax applies when state and applicable municipal city sales taxes have not been paid on products and services (including those transferred electronically) that are used, stored, or consumed in South Dakota. Use tax is a common area that results in findings during a sales tax audit.
Common Instances in Which Use Tax Is Likely Owed:
- Sales tax was not paid when buying the items and the products are not then resold.
For example:- Products removed from inventory for personal use.
- Samples bought by a business to display, or products/samples given to customers at no charge.
- A business donating items, such as prizes for a contest or fundraiser, owes use tax on the cost of the donated item.
- A business does not owe use tax on items donated to entities that are tax exempt.
- Spoilage.
- Sales tax paid to another state was less than what would have been paid in South Dakota.
- Credit is given for purchases with tax due and paid in another state. A receipt or invoice showing the amount of tax paid must be kept as documentation. Use tax is owed on the difference.
- New or used equipment brought into South Dakota is subject to sales or use tax on the purchase price. The business owes state and applicable municipal use tax if the vendor does not collect the sales tax.
- Items taken from inventory to be used for demonstration temporarily and then returned to inventory to be sold later are not subject to use tax.
- Online purchases may be subject to sales and use tax. Check the receipt information when buying items online. If the sales tax is not listed, use tax is owed.
SALES RECEIPT
| PAPER | $40.00 |
| PENS | $28.00 |
| SUBTOTAL | $68.00 |
| SHIPPING | $5.95 |
| SALES TAX | $ – |
YOU LIKELY OWE SOUTH DAKOTA USE TAX
When is Use Tax Owed?
Use tax is owed on the full purchase price, including delivery charges or other fees, where the product is received or removed from inventory. Applicable municipal city sales and use tax rates are based on the location where the product or service is received. Use Tax is owed in the filing period in which the business buys the product or removes the item from inventory. There is a use tax liability, plus penalty and interest if use tax is not reported in a timely manner.
SOUTH DAKOTA TAXES AND RATES
| State Sales and Use Tax – Applies to all sales or purchases of taxable products and service. | 4.5% |
| Municipal Sales and Use Tax – Applies to all sales of products and services that are subject to the state sales tax or use tax if the purchaser receives or uses the product or service in a municipality that imposes a sales tax or use tax. | 1 to 2% |
Businesses using services in South Dakota owe use tax on those services, even if the service provider completes their work outside of the state or is an out of state business. State and municipal city use tax is based on the location where the product or service is received.
Examples:
- A business in South Dakota hires an unlicensed Wyoming accountant to do their payroll. Everything is done through the mail or by phone, use tax is owed on the payroll services.
- An unlicensed attorney from Minnesota provides legal advice to a client in South Dakota on a parcel of land bought in South Dakota. The attorney does not have a sales tax license. The client in South Dakota owes use tax plus applicable municipal city sales and use tax.
Businesses operating in multiple locations both in and outside South Dakota owe use tax on the portion of services allocated to their South Dakota location.
Example:
- A business with locations in North Dakota and South Dakota hires a Minnesota accountant to do their payroll in both states and all reports and billings are sent to the main headquarters in North Dakota. Use tax is owed on the percentage of the service allocated to the South Dakota employees. If 50% of the employees are based in South Dakota, then 50% of the service would be subject to use tax.
Businesses should review all purchases of goods or services to determine if the vendor charged the proper sales tax. Businesses with a South Dakota tax license report use tax on their sales tax return on line two.
The information in this article comes from the South Dakota Department of Revenue. More information can be found here.