Use tax
Encyclopedia
A use tax is a type of excise tax levied in the United States
. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state (not for resale), regardless of where the purchase took place. The use tax is typically assessed at the same rate as the sales tax
that would have been owed (if any) had the same goods been purchased in the state of residence. Use tax applies when sales tax has not been charged. Purchases made either over the Internet
or out-of-state are the most common transactions subject to a use tax.
For example, a resident of Massachusetts
, with a 6.25% "sales and use tax" on certain goods and services, purchases non-exempt goods or services in New Hampshire
for use, storage or other consumption in Massachusetts. Under New Hampshire law, the New Hampshire vendor collects no sales taxes on the goods but the purchaser/user must still pay 6.25% of the sales price directly to the Department of Revenue in Massachusetts as a use tax. If the same goods are purchased in a US state that does collect sales tax for such goods at time of purchase, whatever taxes were paid by the purchaser to that state can be deducted (as a tax credit
) from the 6.25% owed for subsequent use, storage or consumption in Massachusetts. With few exceptions, no state's vendors will charge the native sales tax on goods shipped out of state. New Hampshire vendors, however, do not omit tax because something was shipped to Massachusetts or some other state; rather, they omit sales tax because New Hampshire does not impose a sales tax in the first place.
The assessing jurisdiction may make the use tax payable annually, but some states require a monthly payment. For example, where a Vermont
resident has not paid at least 6% sales tax on property brought in for use in the state, Vermont law requires filing a tax return
(Form SU-452 and payment) by the 20th day of the month following non-exempt purchases to avoid a $50 late fee, a 5% penalty per month, to a maximum of 25%, plus statutory interest on the unpaid tax and penalties.
Typical exemptions include purchases by charitable
non-profit organization
s or governmental agencies, purchases for resale in commerce, and purchases via "casual sales" by individuals not in the ordinary course of business. Also note that there are thousands of tax jurisdictions in the U.S. and many have ever-changing lists of specific types of goods and services that are not taxable.
As an illustration of the complexities: a 2006 Massachusetts law requires payment of tax on "pre-written" (not custom) software purchased and downloaded over the Internet for installation and use in Massachusetts, regardless of where it originates. However, the actual use of the same software downloaded by a Massachusetts resident to a server in another state remains a non-taxed "service". In contrast, Arkansas
generally does not tax anything delivered over the Internet (such as downloaded software or music), except VoIP which is specifically defined as taxable "telecommunications services". Software (pre-written or custom) "delivered thru a tangible medium" (i.e., on disk) in Arkansas is taxable even if ordered online, except "custom software for a particular customer" which is non-taxable "programming services" even if delivered on a disk.
In most cases, this complexity is part of the underlying sales tax
laws; but while a brick-and-mortar store has to deal with only the sales tax laws of its own location, remote sellers have to deal with the use tax laws of many jurisdictions—up to every US state and locality that assesses them, if the company has a presence or "nexus" in every state (as large "brick-and-mortar" sellers like Wal-Mart
and Best Buy
do).
For another example, suppose a carpet manufacturer sends swatches of carpet to its sales people to use as samples. That is a taxable use of carpeting to the manufacturer (or distributor as the case may be).
Large manufacturers purchase many items that are used in both exempt and nonexempt manners. To facilitate determination of the correct tax due, they use a Direct Pay Permit that authorizes them to omit sales tax to their vendors, while requiring them to self-assess their purchases and remit the correct amount of use tax to the proper taxing authority.
It is also possible that equipment purchased under a manufacturing or mining exemption in one state is later relocated across a state line—into a jurisdiction where the exemption no longer applies. In this case, the company must recognize the book value of the capital item when it was relocated as the basis of the use tax due to the nonexempt state. Another form of use tax related to this example is referred to as reciprocity. Reciprocity is triggered when items taxed at a lower rate are transferred or put to use (subsequent to first use) in a taxing jurisdiction with a higher rate. The use tax due, where StateA is the sending state and StateB is the receiving state, is typically StateB rate - StateA rate] + local rateB] x tax basis]. Most states do not offer reciprocity for their local rates, and they may have specific states they will reciprocate with or they may reciprocate on a quid pro quo basis with the other state.
Tax practitioners in large corporations must always be vigilant of transactions such as the above examples that trigger tax consequences for two reasons: to make sure they are in compliance with state laws, and to take advantage of all possible planning opportunities to minimize or avoid tax. Where the tax consequence is substantive and/or the law is vague, assistance will often be sought from outside professionals such as consultants, CPAs, or attorneys who specialize in sales and use tax and who keep up to date with the changing laws and case law history of the various states.
As the amount of e-commerce sales continues to rise ($34 billion for just the second quarter of 2008) states recognize that the key to collecting these taxes rests not only in educating the individual taxpayer but with coordinating their efforts with other states. Currently, there are 19 full member states and 3 associate member states that belong to the Streamlined Sales Tax Project
(SSTP). The SSTP assists states in collection of sales and use tax by registering merchants who charge out-of-state consumers the appropriate state sales tax and remit the tax to the appropriate state through a certified service provider. SSTP has also been in the forefront of an effort to push Congress to amend the laws to make collection of sales tax less burdensome. In fact, in August 2007 a bill was introduced in the House that would have given the states authority to require sellers to collect sales tax on out-of-state sales; however, the bill appears to have never made it out of committee. States may also work with adjacent states via interstate use tax agreements. These agreements allow states to exchange tax audit records from businesses that have shipped goods to out of state consumers. Reciprocal states will then use those records and send a tax bill including penalties and interest to the individual taxpayer.
States have also pursued their collection efforts through the court system. In 2007, a California appeals court ruled that Borders Online owed California sales tax for online purchases that the store failed to collect from 1998 to 1999 since customers were able to return merchandise bought on-line to Border's retail stores in California.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state (not for resale), regardless of where the purchase took place. The use tax is typically assessed at the same rate as the sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
that would have been owed (if any) had the same goods been purchased in the state of residence. Use tax applies when sales tax has not been charged. Purchases made either over the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
or out-of-state are the most common transactions subject to a use tax.
For example, a resident of Massachusetts
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
, with a 6.25% "sales and use tax" on certain goods and services, purchases non-exempt goods or services in New Hampshire
New Hampshire
New Hampshire is a state in the New England region of the northeastern United States of America. The state was named after the southern English county of Hampshire. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Atlantic Ocean to the east, and the Canadian...
for use, storage or other consumption in Massachusetts. Under New Hampshire law, the New Hampshire vendor collects no sales taxes on the goods but the purchaser/user must still pay 6.25% of the sales price directly to the Department of Revenue in Massachusetts as a use tax. If the same goods are purchased in a US state that does collect sales tax for such goods at time of purchase, whatever taxes were paid by the purchaser to that state can be deducted (as a tax credit
Tax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
) from the 6.25% owed for subsequent use, storage or consumption in Massachusetts. With few exceptions, no state's vendors will charge the native sales tax on goods shipped out of state. New Hampshire vendors, however, do not omit tax because something was shipped to Massachusetts or some other state; rather, they omit sales tax because New Hampshire does not impose a sales tax in the first place.
The assessing jurisdiction may make the use tax payable annually, but some states require a monthly payment. For example, where a Vermont
Vermont
Vermont is a state in the New England region of the northeastern United States of America. The state ranks 43rd in land area, , and 45th in total area. Its population according to the 2010 census, 630,337, is the second smallest in the country, larger only than Wyoming. It is the only New England...
resident has not paid at least 6% sales tax on property brought in for use in the state, Vermont law requires filing a tax return
Tax return
A tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
(Form SU-452 and payment) by the 20th day of the month following non-exempt purchases to avoid a $50 late fee, a 5% penalty per month, to a maximum of 25%, plus statutory interest on the unpaid tax and penalties.
Typical exemptions include purchases by charitable
Charitable organization
A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
non-profit organization
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
s or governmental agencies, purchases for resale in commerce, and purchases via "casual sales" by individuals not in the ordinary course of business. Also note that there are thousands of tax jurisdictions in the U.S. and many have ever-changing lists of specific types of goods and services that are not taxable.
As an illustration of the complexities: a 2006 Massachusetts law requires payment of tax on "pre-written" (not custom) software purchased and downloaded over the Internet for installation and use in Massachusetts, regardless of where it originates. However, the actual use of the same software downloaded by a Massachusetts resident to a server in another state remains a non-taxed "service". In contrast, Arkansas
Arkansas
Arkansas is a state located in the southern region of the United States. Its name is an Algonquian name of the Quapaw Indians. Arkansas shares borders with six states , and its eastern border is largely defined by the Mississippi River...
generally does not tax anything delivered over the Internet (such as downloaded software or music), except VoIP which is specifically defined as taxable "telecommunications services". Software (pre-written or custom) "delivered thru a tangible medium" (i.e., on disk) in Arkansas is taxable even if ordered online, except "custom software for a particular customer" which is non-taxable "programming services" even if delivered on a disk.
In most cases, this complexity is part of the underlying sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
laws; but while a brick-and-mortar store has to deal with only the sales tax laws of its own location, remote sellers have to deal with the use tax laws of many jurisdictions—up to every US state and locality that assesses them, if the company has a presence or "nexus" in every state (as large "brick-and-mortar" sellers like Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
and Best Buy
Best Buy
Best Buy Co., Inc. is an American specialty retailer of consumer electronics in the United States, accounting for 19% of the market. It also operates in Mexico, Canada & China. The company's subsidiaries include Geek Squad, CinemaNow, Magnolia Audio Video, Pacific Sales, and, in Canada operates...
do).
Self-assessment
Not all use tax derives from sales transactions. There are also internal transactions a company might initiate that will trigger use tax consequences. For example, ABC Furniture Company buys its inventory tax-free with a resale certificate, then charges sales tax to its customers. But if this company removes furniture from inventory for use in the retail store by its sales staff, it has triggered a tax incident: use tax is due on the converted inventory that is being used, not sold. The states differ in the tax basis of such a transaction: some tax [cost], others [cost + overhead], and still others [cost + overhead + markup].For another example, suppose a carpet manufacturer sends swatches of carpet to its sales people to use as samples. That is a taxable use of carpeting to the manufacturer (or distributor as the case may be).
Large manufacturers purchase many items that are used in both exempt and nonexempt manners. To facilitate determination of the correct tax due, they use a Direct Pay Permit that authorizes them to omit sales tax to their vendors, while requiring them to self-assess their purchases and remit the correct amount of use tax to the proper taxing authority.
It is also possible that equipment purchased under a manufacturing or mining exemption in one state is later relocated across a state line—into a jurisdiction where the exemption no longer applies. In this case, the company must recognize the book value of the capital item when it was relocated as the basis of the use tax due to the nonexempt state. Another form of use tax related to this example is referred to as reciprocity. Reciprocity is triggered when items taxed at a lower rate are transferred or put to use (subsequent to first use) in a taxing jurisdiction with a higher rate. The use tax due, where StateA is the sending state and StateB is the receiving state, is typically StateB rate - StateA rate] + local rateB] x tax basis]. Most states do not offer reciprocity for their local rates, and they may have specific states they will reciprocate with or they may reciprocate on a quid pro quo basis with the other state.
Tax practitioners in large corporations must always be vigilant of transactions such as the above examples that trigger tax consequences for two reasons: to make sure they are in compliance with state laws, and to take advantage of all possible planning opportunities to minimize or avoid tax. Where the tax consequence is substantive and/or the law is vague, assistance will often be sought from outside professionals such as consultants, CPAs, or attorneys who specialize in sales and use tax and who keep up to date with the changing laws and case law history of the various states.
Enforcement
In 2007, 22 states including New York, California, Ohio and Virginia have included an entry on their state individual income tax return for taxpayers to voluntarily calculate an amount for use tax liability. Taxpayers however have not been so quick to reach into their wallets and forward these taxes to the state. A few of these states have tried another approach by pre-determining the tax liability owed by every taxpayer via a tax table based on the individual’s adjusted gross income. For example, a Michigan taxpayer with $45,000 of income can use the state’s use tax table to estimate his use tax liability as $36. Use of this table is limited, however, to purchases of less than $1,000 and may be challenged during an audit. For purchases over $1,000, the taxpayer must calculate the tax for each item and add this amount to the use tax from the table. States using this method have seen an increase in voluntary compliance over those states that have the taxpayers calculate the use tax themselves.As the amount of e-commerce sales continues to rise ($34 billion for just the second quarter of 2008) states recognize that the key to collecting these taxes rests not only in educating the individual taxpayer but with coordinating their efforts with other states. Currently, there are 19 full member states and 3 associate member states that belong to the Streamlined Sales Tax Project
Streamlined sales tax project
Organized in March 2000, the Streamlined Sales Tax Project objective is to simplify and modernize sales and use tax collection and administration in the United States. It arose in response to efforts by Congress to permanently prohibit states from collecting sales taxes on online commerce...
(SSTP). The SSTP assists states in collection of sales and use tax by registering merchants who charge out-of-state consumers the appropriate state sales tax and remit the tax to the appropriate state through a certified service provider. SSTP has also been in the forefront of an effort to push Congress to amend the laws to make collection of sales tax less burdensome. In fact, in August 2007 a bill was introduced in the House that would have given the states authority to require sellers to collect sales tax on out-of-state sales; however, the bill appears to have never made it out of committee. States may also work with adjacent states via interstate use tax agreements. These agreements allow states to exchange tax audit records from businesses that have shipped goods to out of state consumers. Reciprocal states will then use those records and send a tax bill including penalties and interest to the individual taxpayer.
States have also pursued their collection efforts through the court system. In 2007, a California appeals court ruled that Borders Online owed California sales tax for online purchases that the store failed to collect from 1998 to 1999 since customers were able to return merchandise bought on-line to Border's retail stores in California.
See also
- Taxing and Spending ClauseTaxing and Spending ClauseArticle I, Section 8, Clause 1 of the United States Constitution, is known as the Taxing and Spending Clause. It is the clause that gives the federal government of the United States its power of taxation...
, specifically Article I, Section 9, Clause 5 - Tax exemptionTax exemptionVarious tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
- Tax holidayTax holidayA tax holiday is a temporary reduction or elimination of a tax. Programs may be referred to as tax abatements, tax subsidies, tax holidays, or tax reduction programs. Governments usually create tax holidays as incentives for business investment...
- Tax-free shoppingTax-free shopping-Introduction:Tax-Free Shopping allows shoppers to reclaim the VAT /GST they have paid on their shopping in foreign countries. Promoting the tax rebate and making it easier for tourists to claim it back, has helped to attract travellers to many countries...
- Interstate commerce clause