Unit
- Use tax definition: A complementary tax to sales tax imposed on the storage, use, or consumption of tangible personal property purchased outside the taxing jurisdiction. It prevents tax avoidance on out-of-state purchases while ensuring in-state retailers are not competitively disadvantaged.
- Purpose and rationale: Use tax closes the tax loophole created when consumers purchase goods from remote sellers who lack physical presence in the buyer's state. It establishes a level playing field between local and remote merchants by imposing an equivalent levy on items brought into the state.
- Economic neutrality: The tax structure aims to make the total tax burden equal regardless of where a purchase occurs. Without use tax, consumers would have an incentive to buy from states with lower tax rates or from sellers not collecting tax, distorting market decisions.
- Complementary to sales tax: While sales tax is collected by the seller at point of sale, use tax is typically self-assessed by the buyer if the seller did not charge tax. In a fully compliant system, the combined taxes eliminate any tax advantage from cross-border shopping.
- Applicable transactions: Use tax generally applies to purchases of tangible personal property and certain services for use in the state, including items bought online, from catalogs, or by phone. It also covers items purchased tax-free but later used in a taxable manner.
- Historical context: Before e-commerce, use tax was largely unenforced because tracking individual consumer purchases was impractical. The rise of digital commerce and economic nexus laws has transformed use tax into a major compliance focus for businesses.
- Key difference from sales tax: The obligation to remit shifts from seller (sales tax) to buyer (use tax) when the seller has no nexus. This self-assessment requirement places recordkeeping responsibilities on the purchaser, creating operational challenges for businesses.
- Penalties for noncompliance: States impose interest and penalties for unremitted use tax, which can accumulate significantly. Audit exposure increases when businesses fail to self-assess on large capital purchases or recurring expense items.
- Examples of use tax scenarios: A company buys office equipment from an out-of-state vendor that does not charge sales tax. The company must compute and remit use tax equal to its local sales tax rate. Similarly, raw materials purchased tax-free but subsequently used in finished goods may trigger use tax.
Regulatory Requirement
Regulation: Economic Nexus Standards (2018 Supreme Court Decision)
The U.S. Supreme Court's 2018 decision in South Dakota v. Wayfair eliminated the physical presence requirement for sales tax collection, allowing states to impose economic nexus thresholds. Businesses exceeding a certain volume of sales or number of transactions in a state must now register and collect tax. This ruling significantly expanded use tax obligations because remote sellers are now required to collect sales tax, reducing the buyer's self-assessment burden but increasing compliance complexity.
Quick Revision
- Use tax is a complementary levy to sales tax, imposed on the use, storage, or consumption of out-of-state purchases.
- Its primary purpose is to prevent tax avoidance and ensure fair competition between in-state and out-of-state sellers.
- Buyers are generally required to self-assess use tax when the seller does not collect sales tax.
- Recent economic nexus rulings have shifted compliance burdens, making use tax a critical area for business operations.