Use tax laws exist in every state. The purpose of a use tax law is to ensure a resident of the state does not evade paying sales tax on consumable goods or services that are taxable within their state of residence. Use tax laws allow a state to legally collect tax on items that were purchased outside of the state or online where the tax was not collected and remitted by the retailer or service provider during the transaction.
Currently, only a few states have striven to collect use taxes from individuals. Some items are easier to collect use taxes on than others. For example, if you purchase a car in one state, then move to another state, there are some laws that require you pay sales tax on any newly purchased vehicle within a certain time frame.
California has a fairly easy deterrant for anyone purchasing a vehicle out-of-state–once you register the vehicle, you pay additional California sales taxes at the time of registration. Let’s say you purchased a 2011 vehicle for $25,000 in December of 2010; then you move to California for a job transfer. Upon registering your vehicle in the state of California, you explain that you purchased the vehicle prior to moving to the state, only to find out that you are still required to pay state taxes on the product. They do, however give you credit for a specified amount of the tax you paid to the other state, but all in all, your first registration of that vehicle is subject to use taxes that could add up to a lot of money.
In this example, the purchase of a $25,000 vehicle at 6.25% sales tax in the previous state on December 15, 2010 cost you $1562.50 in sales tax. Your company closes its location in that state and moves you to California at the end of March, 2011. The following week, you go to register your vehicle in the state of California in Santa Clara county. Total sales and use tax for the state of California totals $2313 but you are given a credit for the amount you already paid to the other state, reducing your tax liability to $751, to be paid with registration.
Historically, it has been difficult to collect use taxes from individuals post-sale. According to taxworld.org, “During one period (of Pharaoh taxation) the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax[,] scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.”
And we think income tax audits seem scary! To be audited for our consumable goods and services purchases would mean that we need to keep track of all purchases and our sales and use tax liability for those purchases. Then again, some states also give credit on their state tax return process for sales taxes paid within the state.
As states get more concerned about the fiscal environment within the United States, more of them may begin to hold businesses accountable for collecting those enigmatic sales taxes from residents of their state. As we have seen in recent news, Amazon has certainly been making a strong case, as have state governments and other businesses that the issue of use taxes is not a “done deal” for who has responsibility to collect.
Aside from everyone having a day of accounting or being audited as the people were in Pharaoh’s day, we are sure to see continued discussion on the matter of sales and use taxes in the near future–it affects business, commerce, individual and business ability to report use tax liability.
Recently we have seen states attempt to require businesses to provide reports on purchasing actions of state residents (Colorado) or to deliver tax notices with purchases on behalf of the state (Colorado)–both measures have been rejected or struck down in court actions.
The battle for use tax liability and responsibility isn’t over yet–the only sure thing we know is that every state has a law that provides for use tax to be collected when a purchase is made for a consumable good or service that is used in the state.
About the Author: Susan McLain has over 15 years experience in technical and marketing writing, graphic design, business development and marketing management. She currently works for Avalara, Inc., a Software-as-a-Service (SaaS) company providing automated solutions for sales and use tax compliance for small to medium businesses.