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Use Taxes

As a general rule, a state's taxing power reaches only as far as its borders. What this means for sales tax purposes is that a state cannot impose its sales tax on retail sales that are consummated in other states. This restriction created the concern that purchasers could avoid paying a state's sales tax by making their purchases outside the state. To close this perceived loophole, each state that has a sales tax also has a complementary "use" tax. The use tax applies to the "use, storage, or other consumption" within the state of tangible personal property, the purchase of which would have been subject to the sales tax had the transaction occurred within the state.

Example

Let's assume you operate a commercial photography studio in California. You regularly go to Oregon to purchase all the cameras you use in your business. California can't impose its sales tax on your camera purchases, because those purchases were made outside the state. However, California can subject the cameras to its use tax once you bring them into the state.

The following are the key elements of use taxes:

  • Complementary tax - a state's use tax is designed to be no broader in scope than its sales tax. For the most part, exemptions are the same for both of the taxes. In our example, if you could have purchased the cameras in California free of sales tax, then your use of the Oregon-purchased cameras would have been exempt from use tax. Similarly, the basis for computing the use tax is generally the "selling price" of the property, just as it is for purposes of computing the sales tax. Finally, a state's use tax rates are identical to its sales tax rates.
  • Self-assessment - perhaps the biggest difference between a state's sales tax and its use tax is the manner in which the taxes are paid. For the most part, sales taxes must be paid or collected by the seller. In contrast, the responsibility for reporting and paying use taxes generally falls on the purchaser. This is commonly the case because the triggering event for the tax - the taxable "use" of the property in the state - occurs after the sale is completed and because the state may not have the power to force the out-of-state seller to collect its use tax.
  • Credits - every state other than Nevada allows purchasers a use tax credit for sales taxes paid to another state with respect to the same property. In our example, you would be able to offset your California use tax liability on the cameras by any Oregon sales tax you paid on the purchase.
  • Other taxable uses - in some situations, a use tax liability may arise with respect to property that was not purchased in another state. Perhaps the two most common of these situations arises when you (1) purchase an item free from sales tax by claiming an exemption, but then use the item in a manner that is inconsistent with that exemption or (2) you withdraw from your inventory an item that you produced for sale.

Example

Let's assume you operate a computer store where you sell computers that you personally construct and peripherals such as printers that you purchase from others under the resale exemption.

If you were to start using for business or personal purposes one of the printers that you purchased tax free, you would be liable for use tax with respect to that printer. This is an example of the first situation.

If you were to start using in your business or for personal purposes one of the computers you built, this would also subject you to use tax in many states. This is an example of the second situation.