Use Tax
Use tax is a type of tax levied by numerous state governments in the United States. It functions similarly to a sales tax, but it is applied not at the point of purchase but rather when goods or services are used, consumed, or stored. The primary purpose of a use tax is to ensure that tax is paid on all taxable items in a state, especially those brought into the state without having paid the state sales tax.
Purpose and Functionality
The use tax is designed to protect local businesses from unfair competition by ensuring that out-of-state sellers do not have a tax advantage over in-state sellers. When a consumer purchases a good from out-of-state or online where no sales tax is collected, the use tax ensures that the consumer pays an equivalent amount of tax to their state government.
For example, if an individual in California buys an item in Oregon (which does not have a sales tax) and brings it back to California, they are responsible for paying use tax to California.
Implementation
Use tax is generally self-reported by the consumer, which can make enforcement challenging. States have implemented various measures to improve compliance, such as requiring businesses to report sales to state tax authorities and auditing businesses to ensure compliance.
In some states, taxpayers are required to report unpaid use tax on their state income tax returns. States may also conduct audits to discover underreported use tax.
Differences from Sales Tax
While both sales and use taxes are levied on the privilege of using and consuming goods, they differ primarily in the point of imposition:
- Sales Tax: Collected at the point of sale by the seller and remitted to the state.
- Use Tax: Levied on the consumer for the use, storage, or consumption of goods on which no sales tax has been paid.
Impact on E-Commerce
The rise of e-commerce has heightened the importance of use taxes. With consumers increasingly purchasing goods online from retailers in different states, states have sought to impose use tax obligations on these transactions to ensure tax revenue is not lost. The landmark 2018 South Dakota v. Wayfair, Inc. decision by the United States Supreme Court allowed states to require out-of-state sellers to collect and remit sales tax even if they have no physical presence in the state, thereby reinforcing the importance of use tax in the digital age.