Use tax is a type of tax that is imposed on the use, consumption, or storage of tangible personal property
or certain services when sales tax
has not been paid. It is a complementary tax to the sales tax and is designed to ensure that individuals or businesses do not evade paying taxes
by purchasing goods or services from out-of-state vendors or through other means where sales tax is not collected at the time of purchase.
The concept of use tax arises from the principle of tax equity, which aims to ensure that all individuals or businesses pay their fair share of taxes regardless of where they make their purchases. Use tax is typically levied by state and local governments, and its purpose is to prevent unfair competition between local businesses and out-of-state vendors who may not be subject to the same tax obligations.
The application of use tax varies from jurisdiction to jurisdiction, but in general, it applies when tangible personal property is purchased for use, consumption, or storage within a taxing jurisdiction, and sales tax has not been paid at the time of purchase. This can occur in various situations, such as when individuals make purchases from online retailers that do not collect sales tax, when businesses purchase goods for their own use from out-of-state vendors, or when individuals bring goods into a jurisdiction for personal use that were purchased in another jurisdiction where sales tax was not collected.
To determine the amount of use tax owed, the taxing authority typically requires individuals or businesses to self-assess and report their purchases subject to use tax on their tax returns. The use tax rate is generally equivalent to the sales tax rate in the jurisdiction where the property is used, consumed, or stored. However, if sales tax was paid at a lower rate in the jurisdiction where the property was purchased, the use tax may be calculated based on the difference between the two rates.
It is important to note that use tax compliance can be challenging for both individuals and businesses due to the difficulty of tracking and reporting purchases subject to use tax. Many jurisdictions have implemented use tax reporting requirements to enhance compliance, such as requiring businesses to report purchases subject to use tax on their sales tax returns or requiring individuals to report use tax on their individual income tax
In summary, use tax is a mechanism employed by state and local governments to ensure that individuals and businesses pay taxes on tangible personal property or certain services when sales tax has not been paid at the time of purchase. It serves to promote tax equity and prevent tax evasion
, particularly in situations where purchases are made from out-of-state vendors or through other means where sales tax is not collected.