Understanding Use Tax for Small Businesses

Use tax basically means that a business buying items from out-of-state vendors that do not collect sales tax must pay the tax themselves to the taxing authority. Some states are particularly aggressive about collecting such taxes and won’t hesitate to take an entire industry to court or push gray areas of the law in an effort to collect every last red cent they can.

For example, for some time at Adams Media Corporation, we published a help-wanted newspaper and some of our distribution was through newspaper racks. The printing of newspapers and the purchase of newsstand racks are clearly exempt from sales and use tax in Massachusetts (pronounced “Tax-achusetts”), the state in which we operated.

Nonetheless, a tax collector argued that, because we had little editorial content, our newspaper really wasn’t a newspaper. He demanded the instant payment of tens of thousands of dollars in taxes for every printing of the non-newspaper since its founding several years previous. He also demanded taxes on the newspaper racks that had been purchased out of state and, of course, wanted penalties and back interest as well.

A challenge could have been launched through the state courts, but it would have cost a lot of money and victory might have gone to the state in any case. We paid the bill. But being required to pay sales tax on our distribution racks and on the printing costs of this help-wanted publication was one more incremental factor that accelerated the shutting down of this publication once the economic cycle turned south and job openings dwindled. The tax collector was happy, but my employees who lost their jobs and the people who no longer could find our help-wanted publication, not so happy.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.