Taxable Purchases & Use Tax- Employees
When businesses provide taxable items to employees, there can be different sales and use tax consequences depending on whether the item is given to the employee or sold to the employee.
The key difference is who is responsible for paying the sales or use tax.
A simple example is an employee uniform.
When an Employer Provides a Uniform to an Employee
If an employer gives an employee a uniform, the employee does not pay sales tax on the uniform because there is no sale to the employee.
Instead, sales or use tax should generally have been paid when the employer originally purchased the uniform.
For example, if the employer purchases uniforms from a vendor, the vendor should charge the appropriate sales tax on the purchase.
If the vendor does not charge sales tax, the employer may be responsible for accruing and remitting use tax through its sales and use tax return.
The important point is that the employee is not making a taxable purchase. The tax responsibility falls on the business.
What If the Business Originally Purchased the Item for Resale?
Now consider a slightly different situation.
Suppose the business purchases a shirt that it originally intends to resell to customers. Because the business purchased the shirt for resale, it may qualify for a sales tax exemption on the original purchase.
However, the resale exemption does not apply if the business ultimately uses the item itself.
If the business takes the shirt out of its resale inventory and uses it as an employee uniform, use tax is due on the taxable item.
This is an important point for businesses to keep in mind when purchasing items for resale. Sometimes, an item purchased for resale may ultimately be used by the business instead.
When that happens, the business should review whether use tax is due.
When the Employee Purchases the Uniform
Now consider the opposite situation: the employer requires the employee to purchase the uniform.
In this case, the uniform purchase is taxable to the employee, and the appropriate sales and use tax should be charged on the purchase.
This is true whether the employee purchases the uniform:
- Directly from the vendor; or
- From the employer.
The important distinction is that the employee is purchasing the uniform rather than receiving it from the employer.
The Bottom Line
When it comes to taxable items provided to or purchased by employees, the sales and use tax treatment depends on the circumstances of the transaction.
The key question is who is purchasing or using the taxable item.
If the employer provides the item to the employee, the employer is generally responsible for making sure the appropriate sales or use tax was paid.
If the employee purchases the item, the appropriate sales tax should generally be charged to the employee.
And if a business purchases an item tax-free for resale but ultimately uses the item itself, use tax may be due.
The bottom line is simple: someone will be responsible for paying the applicable sales or use tax on taxable items.
Key Takeaways for Business Owners
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When dealing with taxable items provided to employees, remember:
- Items given to employees: If the employer gives an employee a taxable item, there is generally no sale to the employee. The business should have paid sales tax when purchasing the item or accrued and remitted use tax if the vendor did not charge sales tax.
- Items purchased for resale: A resale exemption does not apply when the business ultimately uses the item itself. Use tax may be due.
- Items purchased by employees: If an employee is required to purchase a taxable item, the appropriate sales tax should be charged on that purchase.
- The circumstances matter: The sales and use tax treatment can depend on whether the item is given to the employee, purchased by the employee, or originally purchased by the business for resale.
Final Thoughts
Businesses should pay close attention to the sales and use tax treatment of taxable items provided to employees. Whether an item is given to an employee, sold to an employee, or purchased for resale and later used by the business can change who is responsible for the tax.
Understanding these distinctions can help businesses avoid overlooking use tax obligations or failing to charge the appropriate sales tax.
As with other sales and use tax matters, businesses should review the rules that apply in the jurisdictions where they conduct business.
Disclaimer: These are general tips. You must learn the rules that are applicable for the jurisdictions where you conduct business.
More Tips in The Sales Tax Sisters Academy
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