State and local taxing authorities are stepping up their enforcement of medical and dental professionals’ use tax obligations. Medical and dental practices that do not properly report and pay applicable use taxes—or keep proper records of payment—risk sales and use tax audits that can create significant tax liabilities, along with substantial penalties and interest. For physicians and dentists to meet their use tax obligations and avoid a sales and use tax audit, an ounce of prevention truly is worth a pound of cure.
1. Use Tax Obligations
Most states impose use taxes that create obligations for physicians and dentists. For example, the state of Ohio imposes a tax on the storage, use, consumption, or benefit received in Ohio of goods and taxable services (the “use tax”). The use tax does not apply if sales tax has already been paid in Ohio. And if sales tax has been paid in another state, then the use tax only applies to the extent the use tax is higher than the sales tax paid in the other state.
Use tax is ordinarily collected the same way as sales taxes. Buyers of goods or taxable services are ultimately responsible for paying applicable use tax. But, the sellers of goods and taxable services must register with the Department of Taxation (the “Department”) and collect, pay, and file use tax returns. Both buyers and sellers have use tax obligations. But what if the seller does not properly collect, report, and remit applicable use tax?
Of course, the use tax statutes and regulations provide the answer. The buyer of taxable goods and services is ultimately responsible for the applicable use tax. So, if the seller does not collect applicable use tax from a buyer, then the buyer must file a monthly use tax return and pay use tax to the Department. Buyers who fail to report and pay applicable use tax are liable for the tax, substantial penalties, and interest that accrues on the unpaid amount of the tax until the buyer pays the tax or the Department issues a tax assessment.
How do medical and dental practices run afoul of state taxing authorities? The practices purchase medical and dental supplies and equipment from suppliers and one of two things happens: (1) either the equipment supplier does not collect the applicable sales and use taxes—and the practice does not pay the tax, or (2) the supplier collects the sales and use taxes and the practice pays, but the practice does not keep good records of taxes it paid. Either way, the state taxing authorities audit the practice’s sales and use tax returns—or lack thereof—and assess significant use tax liabilities against the practices.
2. An Ounce of Prevention
How can medical and dental practices avoid these substantial tax liabilities? Keep meticulous records of every purchase, and work with experienced accountants to determine whether the practice paid the applicable sales and use taxes.
If the practice paid the applicable tax, then keep records of the payment and be ready to present those records to the state taxing authority when an audit happens. If the practice did not pay the applicable tax—for whatever reason—then file the monthly use tax return and pay the applicable use tax when due.
Physicians and dentists who do everything right can still find themselves on the wrong side of an audit. But keeping accurate records and filing and paying use tax returns when due puts medical and dental practices in the best position to get through a sales and use tax audit.
3. A Pound of Cure
Physicians and dentists must prioritize patient care. But in prioritizing patient care, medical and dental practices can overlook their use tax obligations. Overlooking use tax obligations can result in an audit and assessments of tax, penalties, and interest. If you find yourself in a sales and use tax audit, it is critical to have the right legal and accounting team on your side to get you through the audit process with as little disruption as possible.
Vince Nardone
Vince serves as a business advisor to owners and executives of closely-held businesses by counseling them on business planning, tax planning and controversy, mergers and acquisitions, succession planning, and legal issues that may arise in business operations.
Mike Sorice
Mike advises middle-market business owners on matters of business and management succession. He provides corporate and partnership tax advice to business owners and in-house accounting departments about federal income tax, state and local income tax, sales taxes, and excise taxes. In addition, Mike has represented taxpayers before the Internal Revenue Service and Ohio Department of Taxation related to federal, state, and local tax obligations.
Comments