Use Tax
Use tax is a tax levied on the use, storage, or consumption of a tangible personal property or service in a jurisdiction where the property or service was not purchased. The use tax is typically assessed in situations where sales tax was not charged or was charged at a rate lower than the use tax rate in the jurisdiction where the property is used. Essentially, the use tax complements the sales tax and ensures that tax is collected on all eligible transactions, even those conducted across state or jurisdictional lines.
For example, if you live in a state with a 6% sales tax rate and you purchase a product from another state with no sales tax or a lower sales tax rate, you would be required to pay a 6% use tax when you bring that product into your home state. The aim is to prevent tax evasion and unfair competition for local businesses that have to charge sales tax.
Use taxes are commonly applied to purchases made over the Internet, through mail-order catalogs, or in other states or countries. Many jurisdictions require taxpayers to report use tax liabilities on their income tax returns, and some also provide forms specifically for the reporting of use tax. However, compliance rates for use tax are generally low, and enforcement varies from jurisdiction to jurisdiction.
The specifics of the use tax—such as the tax rate, the types of goods and services to which it applies, and how it is enforced—can vary by jurisdiction. Therefore, it’s essential to check the regulations in your specific location to understand your use tax obligations.
Example of Use Tax
Let’s say you live in State A, which has a 7% sales tax rate, and you purchase a new laptop for $1,000 from an online retailer based in State B, where the sales tax rate is only 4%. The retailer doesn’t collect sales tax for State A, only for purchases that are made within or shipped to State B.
Calculation without Use Tax
- Cost of laptop: $1,000
- Sales tax in State B: 4% of $1,000 = $40
- Total cost: $1,000 + $40 = $1,040
You receive the laptop and start using it in State A. Since the online retailer didn’t collect the 7% sales tax rate that State A requires, you technically owe a “use tax” to State A for the item you purchased from State B.
Use Tax Calculation
- Cost of laptop: $1,000
- Sales tax rate in State A: 7%
- Use Tax owed to State A: 7% of $1,000 = $70
Adjustment for Sales Tax Already Paid to State B
In some jurisdictions, you may be able to offset the use tax owed by the amount of sales tax you already paid to the other state (State B in this case). If State A allows this, the additional tax you would owe to State A would be:
- Use Tax owed to State A: $70
- Sales Tax already paid to State B: $40
- Additional tax owed to State A: $70 – $40 = $30
You would be required to report this $30 use tax obligation on your State A tax return (or sometimes on a separate use tax return form, depending on the state). By paying this tax, you ensure that you are in compliance with your state’s taxation laws, thereby leveling the playing field between local retailers—who have to charge the 7% sales tax upfront—and online or out-of-state retailers.
Failure to pay use tax may lead to penalties, although the specifics can vary by jurisdiction and enforcement is generally not as strict as it is for other types of taxes. Nonetheless, it is a legal obligation in many jurisdictions.
