Clearing Up the Confusion About Use Taxes

How Do Use Taxes Differ From Sales Taxes?

Use Tax Explained
Use Tax Explained. Westend61/Getty Images

Business owners in states that have use taxes may be confused about these taxes. A new bookkeeping client in Washington said he didn't realize he had to pay a use tax for business purchases he made in Oregon. 

It sounds like time to clear up the confusion.

What Is a Use Tax? How Is a Use Tax Different From a Sales Tax?

Sales tax is imposed on sales of tangible personal property, while a use tax is a type of excise tax.

The use tax is imposed upon the first use of that piece of property in a state. For example, let's say you buy a business car in Oregon (which has no sales tax) and drive it across the Columbia River to Washington (which has sales tax).

The state of Washington says you must pay use tax on that car as soon as you get across the border, because you used it in Washington then. How does the state of Washington know you must pay use tax? You register the car in Washington.  

What Business Property Items Is Use Tax Imposed On?

As noted above, almost all personal property may be subject to use tax. Some states require use tax on resales. Other states impose use tax on businesses that take items out of inventory for a taxable use. 

Use taxes may also be required on purchases in which the sales tax was less than the sales tax in another state. For example, if the sales tax in State A (where the purchase was made) was 6.25% and the sales tax in State B (where the buyer lives and uses the item) is 7.25%, the additional 1% may be required to be paid to State B.

 

Washington has a list of business items that may be subject to use tax if no sales tax has been paid on them: 

  • Supplies, fixtures, and equipment purchased from an out-of-state vendor.  
  • Supplies, fixtures, and equipment acquired when an existing business is purchased.
  • Promotional items, magazine subscriptions, software, and other items purchased over the internet. 
  • Articles manufactured by the business for its own use. 

What if an Item Is Exempt From Sales Tax? 

According to Investopedia, "If the purchase would have been taxed had it been made in the purchaser’s state of residence, then use tax is due." So, in the example above, a car that was subject to sales tax if purchased in Washington would be subject to use tax. But, if an item is exempt from sales tax in Washington, it's also exempt from use tax. 

What's the Purpose of a Use Tax? 

As with the Washington/Oregon scenario above, use taxes have been imposed by states to recover lost revenue from people who purchase large-value items in a state with no sales tax, and then use the item in a state with sales tax. For the same reason, use taxes may also be imposed on ​internet sales

Are Both Businesses and Individuals Required to Pay Use Taxes? 

Yes, use taxes are imposed on all use of tangible personal property. Businesses bear the larger share of these taxes because they buy higher-priced items and more of them. A family might buy one or two cars, while a business might buy a dozen for use by sales people. 

What States Have Use Taxes?

Of the U.S. states, 45 states have use taxes. Most, like Washington and Massachusetts, have both sales taxes and use taxes.

if a consumer pays sales tax on an item, no use tax is due. 

Five states —​ Alaska, Delaware, Montana, New Hampshire, and Oregon — impose no sales or use taxes, but individual localities may impose these taxes and some of these states impose use taxes on specific items. Montana levies use taxes on lodgings, campgrounds, and other accommodations. New Hampshire levies taxes on restaurant meals, room occupancies, and motor vehicle rentals. 

Do Use Taxes Apply for Leases? 

Some leases (vehicle leases in particular) are like a purchase, and use taxes may apply. Tonya Moreno says, "Most, if not all, states consider leases of tangible personal property to be taxable sales." Apartment leases don't usually count for sales taxes, but hotel rooms usually do. Check with your state's department of revenue for details.

 

How Are Use Taxes Enforced and Collected?  

That's a good question. There's no requirement that a retailer in a state with no sales tax has a duty to impose sales tax on out-of-state sales. If a customer buying a car in Oregon has a Washington address, no sales tax has been taken out. If the item of personal property is registered in some way (like a registration for a car), that registration can be used to check against use tax payments. 

Some states, including Minnesota, include a line item on state income tax returns asking for voluntary reporting of items subject to use taxes.

The Streamlined Sales Tax Project, a cooperative among 44 U.S.states, has an agreement that many of these states have signed or allied. The agreement encourages states to work together to collect sales and use taxes.

For More Information on Use Taxes

Biztaxfilings.com has sales and use tax information for each state.

Use these websites for each state taxing authority