The state of New Jersey imposes a 7% sales tax on the purchase of various goods and services with numerous exemptions, such as a purchase for resale. A complementary use tax is imposed upon the use within New Jersey of tangible personal property and upon the receipt of services when such taxable property or service was not subject to the state sales tax.

A seller of goods or services is required to charge New Jersey sales tax to its customers if it has “nexus” with New Jersey, meaning sufficient contact with the state. A seller that maintains no physical presence in New Jersey and which does not have a sales force on the ground in New Jersey soliciting sales – typically a mail order or Internet seller – will often lack nexus for New Jersey sales tax. Accordingly, such sellers are not required to register with the New Jersey Division of Taxation as a sales tax vendor and are not obligated to charge, collect, report, and remit New Jersey sales tax. When a New Jersey taxpayer purchases goods or services from a seller lacking New Jersey nexus and the items purchased are subject to sales tax, the purchaser becomes liable for use tax.

Another situation where a New Jersey taxpayer becomes liable for use tax is when the seller of goods and services has New Jersey nexus, but fails to charge tax on a taxable item. One item that often crops up in this regard is snow plowing. This service falls under the heading of taxable maintenance and repair services. However, snow plow operators are often unaware of the fact that this service is subject to sales tax, or they are not registered as sales tax vendors.

It is ultimately the purchaser that pays sales tax. When the purchaser is charged sales tax, the tax is remitted along with the underlying purchase price to the seller that has a fiduciary responsibility with the state to report and remit the tax to the Division of Taxation. So, when a taxable item is purchased by a customer and no sales tax is charged, the purchaser becomes liable for use tax.

If the purchaser is a registered sales tax vendor, it has the ability to self-assess use tax as part of its regular sales tax filings. Businesses that do not sell taxable goods or services (i.e. law firms or medical practices) are considered “nonsellers” and accordingly are not required to file monthly or quarterly sales and use tax returns. Non-seller businesses whose average annual use tax for the last three calendar years is $2,000 or less may file an Annual Business Use Tax return (Form ST-18B) due May 1 following the calendar year of filing.

The New Jersey Division of Taxation conducts many audits looking for use tax. For sales and use tax filers, the statute of limitations for use tax is four years. For non-filers, there technically is no statute of limitations. In such situations, the Division of Taxation will conduct a seven-year audit. Whether the audit period is four or seven years, the auditor will choose a sample period for everyday expenses leading to the extrapolation of a computed error ratio. Using the snow plowing example again, if there was snow plowing in the sample period for which tax was not charged, regardless of whether it snowed every winter during the audit period, the taxpayer will be assessed tax for the entire audit period. On the other hand, the taxpayer will need to produce all fixed asset invoices as businesses typically do not make fixed asset purchases on a recurring basis. Failure to supply fixed asset invoices will lead to the assessment of tax equal to 7% of the invoice amount(s).

Neil Becourtney, CPA
CohnReznick LLP