Use taxes are levied by states rather than by the federal government or cities. A use tax is a tax on items that are to be used, stored or consumed within the state in which they are purchased. Goods that incur a use tax are not sold for the purpose of resale.
An Internet sales tax is a tax on goods and services available for purchase in virtual stores on the Internet.
The Use Tax
Use taxes are a type of excise tax. The use tax's purpose is to capture tax revenue from the sale of items outside of state boundaries. The tax applies to items purchased through catalogs or over the Internet to consumers living in a different state than the seller. Use taxes are substitutes for a sales tax when a sales tax isn't applicable to a purchase because the state where the package is being sent doesn't have sales taxes or has differing sales tax regulations from the seller's state.
The use tax maintains competition between businesses that have to charge their customers taxes because their states mandate sales taxes and businesses that do not have to charge sales taxes. It is typically the same rate as a sales tax would be and is not intended to make items more expensive than if they incurred a typical sales tax.
Use taxes also apply when a business takes a good from its own inventory for personal use rather than for sale. The tax is based on the purchase price of the item rather than an item's accounting value. Exempt from the use tax are goods that are also commonly exempt from a sales tax, such as grocery staples and items purchased with the intent to be resold.
Should a person purchase a good that is free of a sales tax, it may be because it is from the Internet or from a mail-order catalog. In states that impose use taxes, the consumer would be expected to file taxes along with a personal income tax return or within a separate filing. Use taxes and sales taxes are not meant to be charged concurrently, so if a sales tax is charged on an item purchased over the Internet from a different state, a use tax would not be applicable nor require filing.
Use taxes are partially based on the honor system, and there are few efforts to enforce them in the same manner that sales taxes are enforced.
The Internet Sales Tax
Some states have already imposed Internet sales taxes while federal legislation on the matter is pending in Congress. As it stands right now, if a company does not have a physical presence, such as a shop, warehouse or office, in a state, then it does not need to charge the sales tax because it has no identifiable nexus. Many online retailers currently do not charge a sales tax to customers.
Some online retailers have attracted enough attention that states have made specific laws for the application of sales taxes. Amazon.com is one of these websites, and many states, including New York, California and Massachusetts, have implemented sales taxes for goods purchased from Amazon. Other states, including Louisiana, Colorado and Ohio, do not collect sales taxes from sales made on the website.
The current trend towards implementing Internet sales taxes is becoming more prevalent as a means of obtaining tax revenues for states. It is likely that more states adopt an Internet sales taxes, but how these states will codify, enforce and maintain these laws in light of adverse public reactions is yet to be seen.