Use Tax – What Do You Owe?

SALT Report 1260 – Purchasing books, computers, or office supplies online might seem cheaper than buying them from your neighborhood retailer because you can save a little money on sales tax.  However, as tempting as saving a few dollars may sound, it is important to know that that purchase may still be subject to tax. Consumers who aren’t charged sales tax at the time of purchase must remit use tax to their local state sales tax department instead.

Use tax applies to most purchases made online, through mail-order catalogs, and from out-of-state retailers.  While many of us have never heard of use tax, it has, in fact, been around for decades it’s just that until recently most people didn’t do a lot of out of state or online shopping, so collecting it wasn’t an issue.  Recently though, states have been looking for ways to offset some of their massive budget deficits and one easy way to do that is to go after businesses and individuals for years of unpaid use tax.

Use tax is levied on all untaxed purchases of tangible personal property that you have the “privilege of using, storing, or consuming” in your state.  What this means is that if you bought something and used it, consumed it, or simply had possession of it in your state and did not pay sales tax when you bought it then you owe use tax.  Use tax is similar to sales tax with the only real difference being who is required to remit it to the state, the purchaser or the seller? Typically that burden belongs to the purchaser.

Businesses have been required to pay use tax for years.  Although recently the nexus web has grown so large and complicated that even those with tax advisors are finding themselves caught off guard by new regulations.  In fact, a 2010 survey conducted by Thomson Reuters found that, “95% of companies surveyed underestimated their nexus footprint, and 85% of participating companies underestimated the number of states they needed to register in by more than 50%.” The survey concluded that businesses were setting themselves up for potential liability because, “[they] often failed to realize that using independent contractors, performing services, or participating in a trade show can create nexus in a state.”

As for the individual, use tax is something many have been unaware of until very recently and yet the individual may likely be the unsuspecting target of local sales tax departments.  Because for the first time, states are requiring individuals to report and pay use tax on their state income tax returns.  That means you tell them what you think you owe and they will tell you if they agree with you.  If they agree with your assessment, that’s great.   However, I’m guessing they won’t as there is too much money at stake.  Use tax is a state’s way of ensuring that they can collect revenue on every taxable item that is purchased within their borders.

At first glance, the new regulations and reporting requirements may not seem like a big deal but they are.  Auditors are able to go back many years and review your purchasing history and just think what that may turn up…For business owners, that can mean that once an auditor identifies the use tax you owe, they might then look at the taxes you have collected from your customers and from there, they may move on to your customer’s clients or vendors, and so on.

As for individual consumers, don’t even think about “forgetting” to fill out the new use tax section on your income tax return because you can’t.  If you file electronically that line CANNOT be left blank.  If you use a preparer or do your taxes yourself and leave the line blank then you are just asking for an audit.  Further, if it is determined that you owe use tax and have failed to report or pay it, the state will assess penalties and interest in addition to the tax due.

States are losing billions of dollars in tax revenue each year due to sales and use tax noncompliance.  So, in order to protect yourself from past due tax liabilities, it is important to be aware of your business and personal out of state purchases. What starts out as an innocent purchase on a website might evolve into something the state considers a use tax obligation.

Here is a list of a few states that have released guidelines regarding use tax or have offered amnesty programs for those that want to voluntarily report what they owe.

Arizona

California

Colorado

Florida

Illinois

Louisiana

Nevada

New York

Texas

Washington