income tax, your tax return — October 12, 2015

The Use Tax and You

by Bob Williams

use taxes

Most of the time, we’re talking about some aspect of your federal income taxes, and we’ll point to the IRS or the federal government as the usual suspects. This time though, we’re giving credit (or blame) where it’s due – to the states.

Most of us know what sales taxes are – you’re charged a percentage for purchases you make in a state or city. Well, Internet and other out-of-state shopping has made state lawmakers cast a wider net, seeking to charge sales taxes on those purchases too.

State governments, whether or not they already have an income tax, are using general sales tax – also called “use tax” – to recoup a portion of the money people spend outside their state borders. Currently 45 states, plus the District of Columbia, impose a general sales tax. Only five states do not: Alaska, Delaware, Montana, New Hampshire and Oregon.

So, What’s the Difference?

The Sales Tax Institute puts it this way: Sales tax is imposed on retail transactions, and applies to all retail sales of tangible personal property in the state. It can also apply to some services, depending on the state.

Use tax, however, is imposed on consumers of tangible personal property that’s used, consumed or stored in your state. So you pay use tax on stuff you bought out-of-state. It even applies to vendors who weren’t required to collect sales tax in their states. The only good news is that states can’t collect sales tax and use tax on the same purchase – it has to be one or the other.

States started using sales tax to get to retailers like Amazon, who didn’t have to charge sales tax since they were on the Internet. The traditional yardstick was something called a “nexus,” which meant if a retailer had a brick-and-mortar facility in your state (even if it was a warehouse), they had a physical presence in the state and therefore had to charge that state’s sales tax.

Use tax, though, gets around all that. Aimed at the consumer, it’s charged on anything you buy outside your home state’s borders without paying any state’s sales tax. So that sofa you bought off Craigslist in the neighboring state? You owe use tax. The used watch you bought at the flea market on vacation? You owe use tax. Even if your purchases were made at a garage sale, the use tax applies. You picked up used software at the annual swap meet? Yep, you owe use tax.

Use tax rates are usually the same as the state’s sales tax rates.

The Sticky Part

Most of the time, states will include a line on the individual income tax return form to report use tax. States without an income tax will have their own forms for use tax. While most taxpayers don’t intend to become tax scofflaws, the very nature of use tax seems to promote bending the truth when it comes to reporting what they’ve bought elsewhere – if they don’t just lie about it outright.

One thing’s for sure, though. Don’t expect the use tax to go away any time soon.

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