Use Taxes are often reverse Sales Tax that businesses self-assess. This is common in US States and Canadian Provinces with PST (BC, SK & MB) which require businesses to self-assess Use Tax on out-of-state/province purchases. Xero goes a great job of managing Sales Tax we charge on our invoices, and even on Input Tax Credits for countries with a GST/VAT style tax. However, managing Use Taxes are a little more tricky.
Xero will not calculate the Use Tax for you, but it can help you accumulate the raw data. The trick is to be able to flag the eligible transactions. The trick here is to create a Tax Code with a 0% rate, and then to apply this all eligible transactions. If you have more than one form of Use Tax then you should set up more than one code.
If you have suppliers who you almost always have eligible Use Tax transactions from then you should set their default Tax Code to the Use Tax code.
If you need to combine a Use Tax with a GST/VAT tax (such as in Canada), then simply add the Use Tax as a 0% component to the tax rate. You will need this as a separate tax rate than your normal non-use tax rate. This is so that you are able to tag only those transactions that the Use Tax applies to. For example, in British Columbia (Canada) if you are purchasing from out of province, and are being charged the 5% Federal GST and need to self-assess the 7% PST you will need to create a tax rate called “GST + Use Tax” (or similar) which has the following components:
- GST 5%
- BC Use Tax 0%
Reporting your Use Tax
Now that you are tracking the eligible transactions now you need to work out how to report on this number and pay the tax to the appropriate government agency. The first way to do this is through the Sales Tax Report. The Use Tax rate(s) should be included in the report, even though the tax amount is zero. The key data you want here is actually the “Net” amount for this tax code.
In this example the total eligible for the Use Tax is $957.00. If the Use Tax was 7% then you would need to pay $66.99.
If you want to allocate the Use Tax back to the underlying expense accounts you can get this from the Sales Tax Audit Report tab or export the Detailed Account Transaction Report where you can filter, sort or subtotal by Tax Name.
(The references in this article are for the US or Global editions of Xero. Users in NZ, AU or UK will have different reports and Sales Tax options).
