Sales tax has been in the news quite a bit lately. In previous posts I talked about the Marketplace Fairness Act. This proposed legislation would allow states more ability to collect sales tax from online retailers. Normally, a business can only collect sales tax if it has a presence in that state. The complementary use tax works to bridge that gap. Understanding the difference between the two taxes is important to understanding the current debate in Congress.
Use Tax Explained
There are two major components of a use tax. The first is that you or your business purchased an item (perhaps on-line from a vendor with no nexus in your state) without paying your home state’s sales tax. Second, you intend to use, give away, store or consume that item in your home state. The use tax is complementary to the sales tax, and therefore the rate is the same as the residing state’s sales tax. 45 states currently have a use tax. Businesses are generally able to report and remit the tax monthly or annually by filing a sales/use tax return. However, most individuals avoid paying the use tax because states rely on self-reporting. Herein lies most of the uncollected tax that states are so desperately seeking to collect.
Use Tax and Your Business
How does a use tax affect your business? Some examples might be helpful.
You buy office supplies in a state with no sales tax (Ex. MT, OR) and bring them back to your home state (Ex. CA, TX). If your state has a sales tax then you owe use tax on the amount you paid for those supplies.
You purchase a piece of office furniture online from an out of state vendor that doesn’t have nexus in your state. The vendor doesn’t charge sales tax, so you owe the use tax.
Your business manufactures widgets. As part of your marketing efforts, you pull 100 of the “latest and greatest” widgets out of inventory and give them to a select number of your large clients free of charge. You are required to remit use tax to the state on the cost of these items because they are for your “use” in the state as promotional or give-away items.
These are just a few examples but there are many others. As with the sales tax, there are exemptions your business can claim. Exemptions vary from state to state and can be very facts and circumstances driven. This is an area in which we regularly assist clients.
Use Tax and the Marketplace Fairness Act
One difficult aspect of a use tax is that each state has a different tax rate. Then, deciphering each state’s tax code is a daunting task for business owners. The current push to allow states to more broadly tax online retail sales is a result of lost revenue (by some estimates, over $20 billion annually).
Cash strapped states recognize that most people simply don’t pay the use tax. It’s difficult to say if proposed legislation like the Marketplace Fairness Act is really helpful for businesses. Arguably, it depends on the business – online vs. brick and mortar. On the one hand, it would simplify matters by making the use tax requirements simpler for the purchaser. On the other hand, it places more burden on the seller. What are your feelings about the “online sales tax”? Do you think there should be one? Will Congress pass some version of the Marketplace Fairness Act in 2014? Stay tuned!
Photo Credit: Alan Cleaver via Flickr
