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The Tax You Might Not Be Paying: Use Tax

Our 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 [3] 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 [4]. 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 [5] 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 [6].

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 [7])