A use tax refers to a kind of revenue levy which the United States has in place in a wide range of states. The state governments collect and spend these taxes as opposed to the federal government. Use taxes are much like another country’s Value Added Tax or other states’ sales taxes. The difference is that use taxes do not get applied at the ultimate point of sale.
Use taxes become applied in a number of scenarios. Among these is the storage, utilization, consumption, or enjoyment of physical personal property. The point of a use tax is often to capture revenues from items or services individuals or businesses purchase outside of their state of residence. If these items will be stored, utilized, or consumed within the state of residence but escaped the sales tax by being purchased across the state line, then the use tax comes into play.
A simple rule of thumb is that if the sale of an item would have been subjected to sales tax had it been sold in a purchaser’s given state of residence, it will have a use tax levied on it. This assumes that the state of residence in question actually enforces and maintains such a use tax in the first place.
The rate of use taxes is easy to understand. These rates are identical to the local sales tax of the resident to whom they apply. This means that both local sales and state sales tax rates are converted over into the effective use taxes rate. For those residents and businesses which do not pay their use taxes, they can expect to receive penalties and interest from their state of residence in recompense. This assumes they are caught.
Looking at an example makes it easier to grasp the use tax concept. California is a state that enforces both a sales tax and use taxes. They require all of their state residents to pay their sales taxes for any merchandise purchase that qualify. Qualifying items include gifts, furniture, clothing, toys, vehicles, aircraft, and mobile homes. When a California resident makes a purchase of clothing or furniture from a retailer in California, the retailer will naturally collect the sales tax at the point of sale and that same time of purchase. It is then the responsibility of the merchant to turn in the sales tax dollars amount to the appropriate taxing jurisdictions. There would not be any other tax amounts due on the sales price of the goods the resident purchased.
In another scenario, the residents of California in question might purchase their furniture or clothing items from an Arizona-based retailer online. The merchant will likely not be collecting California sales tax off of the buyer. The law of the state of California requires that the buyer has to remit a use tax on the furniture or clothing purchased to the California Board of Equalization. This tax authority will collect the appropriate local and state tax from the residents based upon where in California they live.
If instead the resident of California bought groceries over in Oregon but did not pay out any California state sales tax, there would typically not be any use taxes owed. This is because California does not levy taxes on most groceries.
The retailers escape from the moral obligation to collect the state sales tax of the purchaser’s residence thanks to the nexus rule. If the retailer does not maintain any physical presence, or nexus, then they are released from the responsibility of tax collecting. A nexus can include a warehouse, sales office, or in-state based sales representatives. In some states, the definition is expanded to include online affiliates as well. This means that in all of these cases where no nexus is present, the resident consumer must both calculate up and turn in the appropriate amount of tax to the resident state fiscal authorities.
State governments give out the excuse that these use taxes help to protect their own retailers in the state against the out of state competition (which is not fair because items are priced lower for not levying sales taxes). This may be true. It is equally true that the state governments are most interested in collecting all of the revenues they are due from any state resident who is making purchases across state lines. No matter where they shop, the residents are required to help pay for the local and state government services, projects, and programs which they enjoy within the state they live.