Use Tax

A use tax is a type of excise tax levied in the United States. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state (not for resale), regardless of where the purchase took place. The use tax is typically assessed at the same rate as the sales tax that would have been owed (if any) had the same goods been purchased in the state of residence. Use tax applies when sales tax has not been charged. Purchases made either over the Internet or out-of-state are the most common transactions subject to a use tax.

For example, a resident of Massachusetts, with a 6.25% "sales and use tax" on certain goods and services, purchases non-exempt goods or services in New Hampshire for use, storage or other consumption in Massachusetts. Under New Hampshire law, the New Hampshire vendor collects no sales taxes on the goods but the purchaser/user must still pay 6.25% of the sales price directly to the Department of Revenue in Massachusetts as a use tax. If the same goods are purchased in a US state that does collect sales tax for such goods at time of purchase, whatever taxes were paid by the purchaser to that state can be deducted (as a tax credit) from the 6.25% owed for subsequent use, storage or consumption in Massachusetts. With few exceptions, no state's vendors will charge the native sales tax on goods shipped out of state. New Hampshire vendors, however, do not omit tax because something was shipped to Massachusetts or some other state; rather, they omit sales tax because New Hampshire does not impose a sales tax in the first place.

The assessing jurisdiction may make the use tax payable annually, but some states require a monthly payment. For example, where a Vermont resident has not paid at least 6% sales tax on property brought in for use in the state, Vermont law requires filing a tax return (Form SU-452 and payment) by the 20th day of the month following non-exempt purchases to avoid a $50 late fee, a 5% penalty per month, to a maximum of 25%, plus statutory interest on the unpaid tax and penalties.

Typical exemptions include purchases by charitable non-profit organizations or governmental agencies, purchases for resale in commerce, and purchases via "casual sales" by individuals not in the ordinary course of business. Also note that there are thousands of tax jurisdictions in the U.S. and many have ever-changing lists of specific types of goods and services that are not taxable.

As an illustration of the complexities: a 2006 Massachusetts law requires payment of tax on "pre-written" (not custom) software purchased and downloaded over the Internet for installation and use in Massachusetts, regardless of where it originates. However, the actual use of the same software downloaded by a Massachusetts resident to a server in another state remains a non-taxed "service". In contrast, Arkansas generally does not tax anything delivered over the Internet (such as downloaded software or music), except VoIP which is specifically defined as taxable "telecommunications services". Software (pre-written or custom) "delivered thru a tangible medium" (i.e., on disk) in Arkansas is taxable even if ordered online, except "custom software for a particular customer" which is non-taxable "programming services" even if delivered on a disk.

In most cases, this complexity is part of the underlying sales tax laws; but while a brick-and-mortar store has to deal with only the sales tax laws of its own location, remote sellers have to deal with the use tax laws of many jurisdictions—up to every US state and locality that assesses them, if the company has a presence or "nexus" in every state (as large "brick-and-mortar" sellers like Wal-Mart and Best Buy do).