Definitions

put to use

Use tax

[yoos]
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. Typical purchases that require payment of use tax include those done while traveling (for things carried or sent home), through mail order, or purchases via telephone or internet.

For example, a resident of Massachusetts, which has a five percent "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 five percent of the sales price directly to the Department of Revenue in Massachusetts as a use tax. If the same goods are purchased in a U.S. state that does collect sales tax for such goods at time of purchase, then whatever taxes were paid by the purchaser to that state can be deducted (as a tax credit) from the five percent owed for subsequent use, storage or consumption in Massachusetts. (Clarifying Note: With few hair-splitting 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 percent 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 percent penalty per month, to a maximum of 25 percent, plus statutory interest on the unpaid tax and penalties.

Typical exemptions include purchases by charitable non-profit organizations 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 only has to deal with the sales tax laws of its own location, remote sellers have to deal with the use tax laws of many jurisdictions--up to every U.S. state and locality that assesses them, if the company has a presence or "nexus" in every state (as large "click-and-mortar" sellers like Wal-Mart and Best Buy 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's 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: 1) to make sure they are in compliance with state laws, and 2) 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 a 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 and include the $23 of tax liability on his return. The table is limited however to purchases of less than $1,000. 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 dollars 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 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 give the states authority to require sellers to collect sales tax on out-of-state sales. States will 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 on-line 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. Currently, only Amazon.com and Newegg.com are among the ten largest e-commerce merchants that do not collect state sales tax across the board. All of the remaining ten largest e-commerce retailers now collect sales tax.

States are becoming more adapt at tracking down delinquent taxpayers. Some states even review customs declarations forms to search for that sculpture or painting that was purchased from an overseas dealer and shipped into the United States. The fact of the matter is simple; states are responsible for providing residents with a host of services that are funded from state income and sales tax revenues. States do not have enough resources to find every consumer who has bought an item out-of-state or over the internet and avoided paying use tax. However, as the states continue to lose tax revenue; other taxes will rise to cover the deficiency. In the end, those who fail to report their use tax delinquency will ultimately pay for the deficit over time in other tax increases.

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