Use Tax

What is Consumer Use Tax?

by Ned Lenhart

Use tax definition

You often see “sales and use tax” used together in the same sentence like “peanut butter and jelly.” But use tax is like sales tax’s less popular little brother. Until now. We’re devoting a whole blog post to demystifying “use tax” and explaining why online sellers need to understand this concept.

As consumers, we are accustomed to paying “sales” tax on the purchases we make at local retailers.  Retailers in the 45 states that impose sales tax collect sales tax as a fiduciary for the state revenue agency. In layman’s terms, that means that when the retailer collects the sales tax they are acting as a agent for the state revenue agency and they are holding state revenue until it is remitted.  “Consumer use” tax, on the other hand, is the tax paid directly to the state by the purchaser when the retailer does not charge the appropriate sales tax at the time of the sale.

In other words, just because you, as a consumer, don’t have to pay sales tax on a purchase doesn’t mean a tax isn’t due on that purchase.

I’m often asked if consumer use tax is new.  The short answer is “no”!  Consumer use tax has been around in most states since the early 1950s when the states were imposing their sales tax.   Consumer use tax impacts purchases made by individual consumers and by businesses.  In some respects, managing consumer use tax is far more challenging than managing sales tax.  That discussion, however, is better left to another forum.  Here are some of the common questions and answers about ‘consumer use tax’.

When is consumer use tax due?

In most sates, consumer use tax is due only on the purchase price of items bought from vendors who don’t have a location.   As such, there is no such thing as a “tax free” Internet purchase or a “tax free” catalog purchase!

How is consumer use tax paid?

Consumer use tax is paid directly by the purchaser to the state department of revenue by filing a use tax return or, in some states, by including an amount on the income tax return filed each year with the state.

What items are subject to consumer use tax?

Consumer use tax is imposed on every item that is subject to sales tax if the item had been purchased locally.  If shoes are taxable if purchased locally, then shoes are subject to use tax if purchased online or through a catalog.  In addition, many states impose tax on transportation charges (like shipping), so the consumer use tax would also apply to those charges.

What level of compliance is there for consumer use tax?

This is a critical question and the one that is driving the entire discussion about requiring remote retailers to collect tax in states beyond where they are located.  Consumer use tax compliance by individuals (you and me) is virtually nonexistent.  Outside of a few states that have a line on their income tax returns, almost no individual is paying consumer use tax directly to the state on the items they buy from e-tailers or other remote sellers.    Consumer use tax payments by businesses is much higher but not perfect.  Because businesses are routinely audited by the state departments of revenue and have outside advisers that help with such tax matters, there is a higher level of compliance from businesses.  However, this is not perfect and the state continue to be aggressive at finding companies that owe use tax.

What does this mean to consumers and online sellers?

The lack of compliance by individual and business consumers is causing a meaningful revenue shortfall at the state levels.  As commerce becomes borderless, the tax collected by local store front retailers is not sufficient to meet the revenue demands of the states.   As remote sellers, the states want you to take on the roll of tax collection agent just as the local retailers do that have storefront in the states.  States have all but given up at trying to get individual consumers to pay use tax on the purchases they make, so the only option left is to force the seller (you) to collect the tax at the time of purchase.  There is just so much a state can do on its own to force a business that does not have nexus in their state to collect the tax.  As such, the federal government must be involved.

As consumers, we all have the obligation to pay the use tax on the taxable purchases we make from vendors that don’t charge us tax.  Consumer use tax is not new.  It is, however, one of the most confusing taxes that states have to administer.

That’s right – if you live in a state with a sales tax, you’re supposed to pay either sales or use tax on all items you buy. Why does this matter to you? Enforcing the payment of use tax has been brought in discussions about “internet sales tax.” and we may see it again in this federal legislative session. In the meantime, do you have any questions about use tax? Start the conversation in the comments.

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