Sales Tax Slice: Income Tax Returns Seek Consumer Use Tax Liability, Too




In most states, the 2016 individual income tax season is winding down. Perhaps you filed your return expecting to hear that you had dutifully paid all of your taxes, but what you are about to read may shatter your expectations. In addition to any potential income tax liabilities that you may have incurred in 2016, anyone who purchased tangible property on-line for delivery or use in their home state may find themselves owing use tax on those purchases.

For anyone unfamiliar with a use tax, states impose it on the privilege of ownership, possession, use, storage or consumption of tangible personal property or taxable services. The use tax is a complement to the sales tax; when a seller doesn’t collect sales tax on a taxable transaction, the buyer is supposed to pay use tax on the goods in his or her state. This arrangement serves to prevent in-state residents and businesses from traveling outside of their state in order to avoid paying state sales tax on purchases of otherwise taxable tangible personal property. The use tax mirrors the state sales tax in that it is generally assessed against the same tax base at the same rate.

Internet purchases are a great way to illustrate how use tax liabilities may arise. For example, imagine that, after scouring the web for this year’s fashion trends, you learn that the ‘80s are back and you purchase ‘80s wear from an out-of-state seller while online. If you are living in Virginia, where clothing is taxable, and you purchase your clothing from a retailer in California (who does not collect sales tax from you because he has no physical presence in Virginia), you are required to report the use tax due on line 35 of your Virginia return, Form 760,  and pay the amount due. The same would be true you traveled to Oregon and purchased jewelry (that you intend to rock with your ‘80s gear when you get back home). Oregon does not impose a sales tax,[1] but Virginia does, meaning your annual income tax return should also reflect your use tax obligation at line 35.

If, as you are reading this, you are wondering, “how do states enforce use tax?” you are not alone. It seems the answer is even elusive for state taxing authorities as e-commerce becomes the preferred method for buying goods and services that are commonly taxable among states. Rather than attempting to track down individual purchasers and consumers of goods, the states generally focus their attention on enforcing the tax collection obligation on sellers, both in-state and out-of-state, who have physical presence in the state. Sometimes the states’ enforcement efforts might be viewed as rather creative or inventive (like finding physical presence for sellers placing internet “cookies” on in-state computers).

South Dakota, for instance, requires out-of-state sellers without physical presence to collect and remit sales tax if the seller earned more than $100,000 in gross revenue from sales of tangible personal property, electronic products or services delivered the state in the previous or current calendar year. Alternatively, if the out-of-state retailer sells these classes of goods or services in more than 200 separate transactions, they are also treated as if they have nexus and required to collect South Dakota sales tax. For the sake of example, if Virginia passed the same law, and I purchased my ‘80s wear from a California retailer who satisfied the economic nexus requirements, that retailer would be required to collect Virginia sales tax at the time I made my purchase, and I would no longer be liable for use tax. While South Dakota’s rule is currently being contested in court, a finding in favor of the state will likely have a significant impact on remote sellers if other states decide to follow suit.   

Clearly, coming up with solutions to capture sales and use tax revenue is no simple task. These days, consumers can easily purchase goods from anywhere in the world, making it likely that use-tax policing will be cost-prohibitive and states will continue to focus their efforts on overcoming limitations associated with physical presence requirements.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can states ensure that use tax obligations are reported and collected?

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[1] If the buyer were physically present in a state that imposed sales tax on jewelry in this example, that state’s sales tax would be collected at the time of payment despite the fact that the buyer is an out-of-state resident.