Handling use tax

Use tax is generally applicable when an invoice includes material and the material is not priced separately from the labor. Unlike sales tax, which is charged to and paid by the customer, use tax is paid by the seller. One of the biggest differences between sales tax and use tax is that use tax is calculated against the material cost and not the sell price.  

Within ServMan, the main difference between the software calculating Sales or Use tax is whether the item has a Sales Price on the invoice or not.  

• If an item has a Sales Price on the invoice, then Sales Tax apples.
• If an item does not have a Sales Price on the invoice, as occurs with Flat Rate Items, then Use Tax applies.

Jobs also have a use tax applies option; when enabled the use tax applies option is enabled by default for all orders and invoices associated with the job

Note: The “Batch Bills” program allows entry of AP bills without specifying an item number.  As such, AP bills that are entered through the “Batch Bills” program are flagged to be excluded from the Use Tax report.

Setup tax codes

If the use tax rate differs from the sales tax rate, you will need to add new tax code. See tax codes for additional information.

Do not check the Apply Use Tax check box on the Tax Code Setup screen.  That Apply Use Tax check box (on the Tax Code Setup screen) is a legacy field and is NOT being used.  

Use Tax Process

Use tax due is a company’s tax liability on any material purchased then consumed internally, or delivered/installed for a customer,where sales tax is not paid at the time of purchase, and sales tax is not assessed at the time of resale. 

Important points to consider:

• When a material’s order detail line is posted to COGS, or the invoice is updated to A/R, an inventory adjustment record is created.  That inventory adjustment record will be used by the Use Tax report to recognize the use tax liability.

• The material’s item number, stock or non-stock, must be on a work order or invoice with a warehouse specified to create the necessary inventory adjustment record.

• ServMan will record use tax liability at the time the material is used, unless it is purchased directly to an order or a job.  In that case, the use tax liability is recorded at the time of material receipt.

• The user may override an order (header or detail) and invoice (header or detail) as to whether or not Use Tax Applies to that inventory transaction.  That said, it’s the order or invoice detail’s Use Tax Applies status that the Use Tax report will use, not the header’s setting.

• For items on an invoice, the Use Tax report will trace the inventory adjustment transaction through to the A/R invoice.  If there is a sell price on the item, and if sales tax was charged, use tax will not be calculated regardless of the detail’s Use Tax Applies status.

• ServMan will not track whether or not sales tax was paid when an item was purchased.  For items where sales tax is paid at the time of purchase the user must uncheck the Use Tax Applies check box on the customer’s order/invoice. 

SPECIAL NOTE:  All material consumed for internal use must be listed on an internal work order and posted to COGS or invoiced internally at zero sell price for use tax to be calculated properly.

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Rules governing use tax application

The following rules apply to use tax application:

• Tax exempt clients are excluded from use tax
• Tax exempt items are excluded from use tax
• Items with a sell price not equal to $0.00 are excluded from use tax (sales tax applies if the sell price is not $0.00)
• Invoices where the use tax applies option is not enabled are excluded from use tax; the use tax applies option is on the Advanced tab of the invoice
• Jobs also have a use tax applies option; when enabled the use tax applies option is enabled by default for all orders and invoices associated with the job

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Use tax report

At any time, you can run the "Use Tax Report" to see the applicable use tax for your updated invoices.

1. Select Reports > Sales.
2. Enter the From and Thru Invoice Post Dates
3. Enter additional reporting options as desired
4. Click Print.

See Also:  Tax Codes

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