Sales Tax 101 Use Tax

States Coming After eCommerce Buyers for Use Tax

by Mark Faggiano

If you think sales tax is complicated, let us introduce you to use tax. Use tax is levied by states on their residents who bought an item outside the state (and thus avoided paying sales tax on that item).  Fair or not, use tax is basically a way for states to get taxes they missed out on when you bought an item somewhere else for “use” in their state.

So how does use tax work, and why is it so confusing? To help you understand it, we thought we would take a look at one specific case in California – coincidentally, one of the states trying to get laws passed to require online sellers to pay sales tax.

Use Tax Notices Arriving in California Mailboxes
A close friend of TaxJar (let’s call him Tom) bought an item from Oregon over the Internet. When it arrived, California missed out on sales tax from the purchase. If Tom lives in Temecula,  for example, the tax rate there is 8% (6.5% California base rate plus 1.5% local taxes).

However, Tom doesn’t have to pay 8% for use tax. The 6.5% state rate is the only rate California wants because the use tax rate is an attempt to alleviate competitive disadvantage when sellers buy items from other states. Hence, local tax rates don’t come into play.

To put this into perspective, our friend Tom actually received the following bill from the State of California Board of Equalization:

California use tax notice

Look familiar? You may have received a bill like this at one point and had no idea what it was. The use tax isn’t nearly as “popular” as sales tax, nor is it as talked about. But as states try to devise ways to fill their depleted coffers, that may be changing.

Use Tax Complications
Tom isn’t alone. States like California have been cracking down on use tax. While use tax has never been a huge money-maker for states, if the rules in place are enforced states figure they can bring in some much needed cash to offset the money lost from sales in other states. This is precisely why people like Tom have received notices for the first time.

Most households in states with use tax owe at least a little bit. There are two reasons you might be getting a notice in the mail soon:

–        You bought an item from an out of state retailer and brought it back into and used it in California

–        You made a purchase over the web, phone, mail or in person where California sales tax was not charged and you used the item in California

If you made such a purchase and aren’t sure if you owe use tax, you can visit your state’s Board of Equalization or Tax website. For example, California’s is boe.ca.gov. There you can get a clearer idea of your state’s use tax laws and how much you’ll have to pay if you routinely buy things out of state for use in your state.

Also, the next time you visit your tax professional, you should expect them to bring up the use tax issue. States like California have asked these tax pros to really push their clients to report out-of-state purchases and pay the use tax on them.

Have you received a use tax bill in the mail? What did you do with it? Let’s chat in the comment section below.

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