Use Tax Definition

What Is Use Tax?

Use tax is a sales tax on purchases made outside one's state of residence for taxable items that will be used, stored or consumed in one's state of residence and on which no tax was collected in the state of purchase. If the purchase would have been taxed if it was made in the purchaser’s state of residence, then use tax is due.

Breaking Down Use Tax

The use tax rate is the same as the resident's local sales tax rate, which includes both state and local sales taxes. A resident who does not pay use tax may be subject to interest and penalties. For example, California residents are required to pay sales tax on purchases of merchandise such as furniture, gifts, toys, clothing, vehicles, mobile homes, and aircraft. If a Californian purchases clothing from a California retailer, the retailer will collect sales tax from the buyer at the point of sale and remit it to the tax authorities. No additional tax will be due. 

Let's say instead that the Californian bought clothing from an online retailer in Oregon. Under Oregon law, the retailer does not collect sales tax on the goods, but the retail buyer must still pay a use tax on that clothing purchase to the California tax authority called the Board of Equalization. On the other hand, if the Californian purchased groceries in Oregon and did not pay any sales tax on the purchase, generally no use tax would be due because the state of California does not tax the majority of groceries.

Retailers are usually not required to collect sales tax on purchases made by consumers in states where the retailer does not have a physical presence (called "nexus") such as a sales office, warehouse or sales representative, so the onus falls on the consumer to calculate and remit the tax to his or her state government. Whether a business owes sales taxes to a particular government depends on the way that government defines nexus.

A nexus is generally defined as a physical presence, but this "presence" is not limited to having an office or a warehouse; having an employee in a state can constitute a nexus, as can having an affiliate, such as a partner website that directs traffic to your business' page in exchange for a share of profits. This scenario is an example of the tensions between e-commerce and sales taxes. For example, New York has passed "Amazon laws" requiring internet retailers such as Amazon, Inc. to pay sales taxes despite their lack of physical presence in the state.

Assessing the Use Tax

The use tax, like the sales tax, is assessed upon the end consumer of the tangible good or service, but the difference is who calculates the tax and how it is accounted for. The sales tax is collected by the seller, who is acting as an agent of the state and thus remits the tax to the state on behalf of the end consumer. On the other hand, the use tax is self-assessed and remitted by the end consumer. The use tax is generally more difficult to enforce than the sales tax and, in practice, is only applied to large purchases of tangible goods.

A use tax is supposed to protect in-state retailers against unfair competition from out-of-state sellers that aren't required to collect tax. It is also enacted to ensure that all of a state's residents help fund state and local programs and services, regardless of where they shop. Similar laws apply in most states, not just California. In fact, 45 states have a use tax law, as of 2018.

Article Sources

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  1. Government of Massachusetts. "Sales and Use Tax." Accessed Jan. 19, 2020.

  2. California Department of Tax and Fee Administration. "California Use Tax, Good for You. Good for California." Accessed Jan. 19, 2020.

  3. Oregon Department of Revenue. "About sales tax in Oregon." Accessed Jan. 30, 2020.

  4. Government of Massachusetts. "Determining nexus for Massachusetts Corporate Excise tax purposes." Accessed Jan. 19, 2020.

  5. Small Business Administration. "An Analysis of Internet Sales Taxation and the Small Seller Exemption," Page 16. Accessed Jan. 19, 2020.

  6. Government Accountability Office. "Sales Tax," Page 2. Accessed Jan. 19, 2020.

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