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The Tax You Might Not Be Paying: Use Tax

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TaxesOur tax code is large and often confusing. There are so many provisions that many of us don’t come close to knowing them all. Instead, many of use hire accountants to help us do out taxes.

It’s easy to skip over a tax we don’t know about, as well as miss deductions and credits to which we may be entitled. One of the things you might be missing (intentionally or not) is what is known as the “use tax.”

What is a Use Tax?

Basically, the use tax is a tax levied by states that collect sales tax. If you buy something, and you don’t pay a sales tax, but you use the purchase in your home state, many states expect you to keep track of your purchase amounts and then pay the state sales tax rate on your purchases. You declare your purchases and use tax on your state income tax form.

This includes things that you might buy out of state while on vacation and bring home, as well as items that you purchase from individual sellers in your locality, as through the Classifieds. And, of course, purchases on the Internet are supposed to be subject to your state’s sales tax.

Recognizing that revenue is slipping away, many states have passed laws to enforce sales tax collection by online retailers, notably Amazon. This enforces the use tax for many states, since many of these violations happen online.

What’s Next for the Use Tax?

So far, most of the wrangling over who’s paying what in sales tax and use tax has been confined to the state level, and confined to collecting from purchasers. However, a new bill is being introduced in Congress. The Marketplace Fairness Act aims to require all online sellers to comply with all state and local taxing requirements.

This bill has many up in arms, since there is an argument that small online businesses would have a hard time complying with the thousands of separate taxing jurisdictions (if you count cities as well) in the United States. The provision exempting businesses that earn less than $1 million a year is insufficient in some cases.

Another concern is that, right now, compliance to the use tax is mostly voluntary. If you make a purchase, it’s basically the honor system at work. (I do most of my online shopping on Amazon, which does, in fact, collect my state’s sales tax already.) This would get rid that voluntary aspect on most levels, requiring online retailers to collect taxes.

Supporters of the bill point out that many brick and mortar small businesses are suffering due to the fact that the online competition may not collect sales tax. Supporters insist that this will “level the playing field” and get online shoppers to think about buying from small businesses in their own hometowns, since tax will be collected.

You can find out more about the bill at MarketplaceFairness.org.

What do you think of this move to bring online retailers into compliance with sales tax laws? Do you currently report what you owe in use tax?

(Photo: Tax Credits)

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8 Responses to “The Tax You Might Not Be Paying: Use Tax”

  1. admiral58 says:

    I doubt many keep track of their use tax allocations

  2. Guy In San Antonio says:

    instead of all this pressure to force internet businesses to report sales tax to 46 states, they should simplify this and just require that they report sales by state by person (kind of a state level 1099). From a CPA standpoint, this would be much less of a burden to business and force the reporting obligation to where it belongs

  3. Sailor Jo says:

    Americans love it complicated. In Europe the sales tax (VAT) is countrywide. No state or city can levy VAT. Now that is simple.

  4. Michael says:

    This is a regressive move, as the wealthy have a lower state/local tax burden, with the working poor having a higher state/local tax burden, expressed as a percentage of income. The poster boy for this is previous Massachusetts Senator John Kerry, an upper crust 1 percenter, who bought and docked his vessel, all tax-free in Rhode Island, refusing to support the Massachusetts use tax and dock tax. What do you think of the guy who short sheets the state that he was elected to represent and support?

  5. Grayson @ Debt Roundup says:

    This one always makes me laugh when people think the new sales tax law is a new tax. You are still required to pay tax on out of state purchases. If the can create a single database and one reporting center for all states, this would be super easy to deal with.

  6. Our state comptroller says that HE doesn’t pay the use tax!


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