You Probably Owe Use Taxes

Anyone ever heard of the "use tax?" Well, I hadn't until a few years ago when I hired a CPA to do my taxes.  While I was filling out their annual questionnaire, they asked me about my Internet and out-of-state purchases for the tax year and when I got my return I saw that they had accounted for use taxes I owed. So, what's a use tax you may ask? Here's the answer from MarketWatch:

The use tax is the difference between what you would have paid in sales tax if you purchased an item in your own state versus what you actually paid on the purchase. If your state doesn't collect sales tax on a certain item, then you don't owe use tax on it.

And a few details to explain it:

Many taxpayers think that items they buy on the Internet are untaxed. But it's simply that the retailer is not required to collect the tax. Retailers are required to collect sales tax if they have a significant presence in the "ship-to" state, but they're not required to if they don't. The buyer is still supposed to pay state sales tax.

The piece points out that most people simply ignore use taxes (and don't pay them) even if they know that they exist. But you need to be careful, especially if you buy certain items:

If you buy high-priced items, you'll want to think about the use tax. States often target jewelry purchases, said Diane Yetter, president of Yetter Consulting Services in Chicago, which offers sales-tax consulting to businesses.

State revenue departments also work with customs officials to collect tax on purchases made overseas.

Meanwhile, other states, including Ohio and Tennessee, work with retailers to collect unpaid sales taxes, Yetter said.

So, what should you do to make sure you pay the use tax you owe? Here are MarketWatch's suggestions:

Taxpayers eager to follow the letter of the law should record all purchases they make that are sales-tax free -- if those purchases would generally incur sales tax at home. In particular, record the large-ticket items that might garner attention from the state's tax collector.

Look on your state's revenue department Web site for more information on what items are subject to sales tax in your area. But consumers don't need to worry all that much about the questionable items, Yetter said.

Also, check out the instructions that go with your state's "use tax return" -- they should clarify what you need to include and what you don't. In general, "it's what you pay when you walk out the door and buy it," Smith said. In some states, such as Illinois, the use tax rate is lower than the sales tax rates.

I don't track item by item but always do an estimate each year. I'm sure to include the high-ticket items I purchased -- the ones that make up 90% of the use tax I owe and I put in an estimate for the rest.

Comments

[broknowrchlatr]

I'm sure I owe more use taxes. Every year, I always put a guess on the use taxes I owe. I think of everything I remember buying and then put down an estimate. However, I make certain that I am not overstating it. I ususally end up forgetting about a couple hundred $ in purchases.

We actually keep track and pay use taxes. I thought I was the only one who did so.

[Ryan]

And what if I pay 8% sales tax in a state when my state is only 5? Do I get a refund...?

[WooPoo]

I think you guys are the only three who pay use tax.

[Suze]

Well, we have to ... my husband is a lawyer and in this state it is a greivable offense to disregard the law. And the law states that you have to pay use tax.

That is an excellent incentive to pony up!

[Lord]

Or you could save money by just purchasing locally. Shipping costs are often more than sales tax.

[Hamburger Flipper]

It was a surprise several years ago to learn that apparently, you have the right (technically, legally) to OWN something, but to USE it is (technically, legally) a privilege. Seriously, you can look it up.

[Joseph]

How about us in those states that don't have to file taxes because of no income tax, but with a sales tax?

[mikeb]

From my understanding of Arizona's taxes, this article does not apply to us. Our "sales tax" is actually imposed on the businesses, who have the right to pass it on to the consumers. We ourselves are not paying the state directly. Therefore, if we buy out of state, there is no use tax.