Washington State Use Tax: What It Is and How to Avoid Penalties

Washington State Use TaxWashington’s use tax is one that is paid by both individuals and businesses, and unfortunately, it’s often overlooked. When the Department of Revenue (DOR) finds out that taxpayers have not been paying the use tax on qualifying purchases, they may assess heavy penalties. It’s important to know when you have to pay use tax, what happens if you don’t, and how to remedy any unpaid use tax you may owe.

If you’re facing problems with any taxes in Washington State, contact Seattle Legal Services for help today.

Key Takeaways

  • Sales or use tax – applies to the sale of any taxable items or services in Washington State.
  • Use tax – applies when sales tax hasn’t been collected. For instance, on an out-of-state purchase.
  • Taxation – Sales tax or use tax can apply to goods and services, but not both.
  • What if you don’t pay – You may face penalties and involuntary collection actions.
  • How does the DOR find out – the DOR actively looks for businesses that are non-compliant with use tax requirements.

What Is Washington State Use Tax?

This is a tax charged when certain services or goods are used in Washington if the sales tax has not been paid on those goods or services. Goods and services require payment of sales or use tax, but not both. If you pay Washington sales tax on a product, you don’t then have to pay use tax on the same purchase.

When Does Use Tax Apply?

There are various circumstances in which use tax must be paid. Some of the most common cases are listed here, along with examples:

  • Goods purchased in a state without sales tax or a sales tax that is lower than Washington’s: For example, an item purchased in Oregon, where there is no sales tax
  • Goods purchased from someone who is not authorized to collect sales tax: For instance, items purchased from Facebook Marketplace or an auction
  • Goods purchased from out-of-state sellers via the Internet or mail order: Any online or mail order purchase where sales tax is not collected; however, a growing number of retailers do collect state sales tax now due to the state’s updated nexus laws.
  • Digital purchases: For example, software, digital art, and other digital goods, but only if sales tax was not applied at the point of purchase.
  • Goods acquired when a party purchases real property: For example, furniture or goods you buy when buying real estate
  • Charges for repairs done outside the state on items that are brought back into Washington: For example, vehicles or other machines that are repaired out-of-state and then sent back to Washington.
  • Promotional items distributed within the state: For example, catalogs or brochures

Please remember that the value of the item doesn’t matter. Even if an item is inexpensive, you must account for use tax if it falls in one of the scenarios requiring payment of use tax. Consider how dozens or hundreds of small qualifying business transactions could add up if you were audited by the Department of Revenue.

How Businesses Get Caught Off-Guard

Unfortunately, it’s fairly common for businesses to get hit with a sizable tax bill because of their failure to account for use tax. Even businesses that are diligent about their sales tax requirements may overlook use tax. There are a few different reasons for this. 

A growing number of transactions are conducted over the Internet, and not all vendors collect sales tax. However, some of the largest online vendors—Amazon and eBay, for example—do automatically calculate and collect sales tax based on a buyer’s address and their local tax laws. This makes it easy for businesses and individuals to get complacent when it comes to documenting use tax. When some vendors collect sales tax, it’s easy to assume that they all do, leading to missed transactions.

Businesses also often assume that their accountants are taking care of the use tax they owe and keeping track of everything for them. Due to the specific requirements under Washington state law, it’s easy for accountants to overlook use tax, leading to penalties for businesses and individuals. Keep in mind that unless you’ve reached out for tax planning help, your accountant or bookkeeper is most likely just reporting the numbers that you give them. For instance, if they see a purchase in your bank account, they will classify it as a capital or current expense, but they may not reach out to make sure that you’ve paid the use tax on it. 

How the Department of Revenue Finds Unpaid Use Tax

Use tax is one of the most common ways people fall out of compliance with Washington tax law—and the Department of Revenue knows that. Because of this, they are actively looking for use tax and trying to find ways to catch non-compliant entities. 

Data from third parties, including vendors and the IRS, can help the Department of Revenue find non-compliant businesses and consumers. Shipping records provide proof of goods purchased from outside the state for which sales tax has not been paid. 

Additionally, businesses may unintentionally fall out of compliance with other types of taxes, such as B&O tax and sales tax. When the IRS finds that a business has not been paying B&O tax, they may conduct a full-blown audit on the rest of the business’s taxes. This can lead to the discovery of unpaid use tax.

How the DOR Finds Unpaid Use Tax During an Audit

During a business tax audit, the DOR may compare your sales tax returns to your sales records to ensure that you’re reporting all your sales. They’ll also compare your state excise tax returns to your sales reports to make sure that you’ve been paying the correct amount of B&O tax. Additionally, they’ll look at your business’s federal income tax returns, and they may ask to see receipts of both capital and current expenses. 

For instance, say that you claimed a $10,000 deduction for a vehicle. The DOR will ask to see the receipt, and if you can’t provide that or if you provide an out-of-state receipt that doesn’t show sales tax, the state will assess use tax against you.

Penalties for Failing to Pay Washington Use Tax

The Department of Revenue assesses costly penalties for unpaid or late taxes. A 9% penalty is immediately assessed when a business does not pay by the due date. This increases to 19% after the last day of the month following the due date and 29% after the last day of the second month following the due date. If you are caught out of compliance before you pay your balance due, including interest and penalties, the penalty can jump up to 39%.

This can add up quickly when you’re dealing with large business purchases. For instance, say that you fail to pay use tax on a $10,000 purchase. The use tax is the same as the sales tax rate in your area – that’s the 6.5% state sales tax plus your local rate. The state sales tax alone on this purchase is $650, and if you add the 39% penalty, that is $253.50. Now, you owe $903.50 plus interest backdated to the purchase date.

How to File and Pay Use Tax in Washington

For businesses, use tax is typically reported and paid via the excise tax return. Use tax accounts for just one line of the return. You mark the gross amount of the value of items subject to use tax, multiply it by the appropriate tax rate, and calculate the tax due. You must pay use tax and all other excise taxes electronically via My DOR unless you have a waiver for paper filing.

Consumers who do not file excise taxes and just need to report and pay use tax one time can use the “Consumer Use Tax Return.” This allows you to report the name of the seller, location code, value, tax rate, and tax due. You can send it in with your payment to the Department of Revenue. You can file this return online, or mail in a paper copy of the Washington State use tax return.

Can You Reduce or Settle a Use Tax Bill?

If you’ve been unpleasantly surprised by the use tax in Washington, you’re not alone. Instead of panicking, it’s important to learn more about what you owe and how you can become compliant with DOR requirements. Here are some options to consider:

Voluntary disclosure

If this is part of a larger problem and you’ve never registered as a business in Washington, the voluntary disclosure program may be an option for you. Note that this is not available if you’ve already received a notice from the DOR about your failure to register and pay taxes. If you are accepted into the voluntary disclosure program, you can register your business and pay what you owe to avoid further consequences. This decreases the penalties you owe and allows you a shorter lookback period, which ultimately saves you money.

Penalty waivers

You may also want to look into penalty relief available through the Department of Revenue. If you have at least 24 months of compliance and on-time payments immediately preceding the current penalties, you may qualify for what is essentially first-time penalty relief. You can also request penalty relief if you have a legitimate reason for not paying.

Installment agreement

If you are willing to pay the full amount you owe, but you just can’t pay it all upfront, the DOR does offer self-service payment plans. You must owe less than $100,000 and be able to pay off what you owe in no more than 12 months. If you need more time or cannot comply with payment requirements, you may have to work with an attorney or the DOR to work out another plan.

Help from an attorney.

Working with a Washington tax audit attorney is an option if you have been selected for an audit. In this case, you don’t just have to worry about use tax—you have to consider all excise taxes and your overall compliance. Regardless of which path forward meets your needs, talking to a Washington tax attorney can give you a better understanding of your options and peace of mind.

Industries At Risk of Use Tax Exposure

Certain industries are at greater risk of use tax non-compliance, and as a result, they may be subject to greater scrutiny by the Department of Revenue. These industries tend to order a substantial amount of goods from outside the state, send goods for repair outside the state, or engage in online purchases. They include:

    • Construction and physical trades, due to the equipment and materials they have to source from around the country
    • Restaurants and bars, as they often source niche decor, kitchen tools, ingredients, and alcohol from out-of-state sources
    • Medical and dental offices, due to the specialized equipment and supplies they may purchase
    • Professional service providers, including those who work with computers, create software, or provide online tools.
  • E-commerce retailers and remote sellers

Benefits of Working With a Washington State Tax Attorney

Trying to figure out state tax laws is complex and requires an in-depth understanding of the tax laws and regulations. Even one misunderstanding of tax law can leave you on the hook for thousands of dollars in interest, penalties, and back taxes. A Washington State tax attorney can help you respond appropriately to DOR notices and audits, comply proactively if you have not yet been contacted by the Department of Revenue, or negotiate penalty reductions.

If you’ve received a tax bill or you’re worried that you owe use tax, don’t take on the Department of Revenue alone. Schedule a confidential consultation with Seattle Legal Services to protect yourself—just call us at the phone number above or contact us online.

Frequently Asked Questions

What is the difference between sales and use tax in WA?

Sales tax is paid on purchases in Washington, while use tax is generally paid on purchases made outside the state in municipalities with lower sales tax rates. Use tax also applies in other situations, such as purchases from those who cannot collect sales tax.

How do I know if I owe use tax as a business owner?

You can learn more about use tax via the Department of Revenue and find out if any of your purchases or transactions fall under use tax guidelines. However, working with a tax attorney ensures that you get personalized guidance regarding your tax obligations.

What happens if I ignore a use tax notice from the DOR?

They will move forward with more aggressive collection actions, including tax warrants, liens, and asset seizures. You may even have your business license revoked.

Can individuals owe use tax in Washington?

Yes. The DOR has a separate tax form for consumers to report and pay use tax.

Is use tax part of B&O tax or excise taxes?

It is part of excise taxes, but it is not the same as B&O tax.

Do businesses owe use tax on donated goods?

Yes, the DOR says that businesses should pay use tax on donated goods. Generally, you should account for donated items based on their fair market value on the day you receive them, and then, you should calculate the tax accordingly. However, you may want to consult with a tax attorney if the item has significant value.