Sales Tax on Out of State Purchases

If I buy an item out-of-state, I’m often told that I won’t have to pay sales tax… then someone local told me that I will have to declare any purchase over a certain amount and pay “use tax.”


What’s the deal?

This probably varies from state-to-state, but here in SC, that is indeed the case.

If I order/purchase something from out-of-state, I am supposed to pay a “use tax,” showing it on the state tax return.

That law has been on the books for many years, and I don’t think it makes a distinction between mail-order and Internet sales.

Hardly anyone does it, but that is the law here.

That’s also the case in Utah. There is a space on the state tax return to declare the dollar amount of out-of-state purchases and then pay “use tax” which is at the same percentage rate as sales tax. Again, few people declare anything.

Ditto for Virginia.

Ditto Michigan.

All the states that have a sales tax have a compensating use tax. Sales tax is suppose to apply to sales made within the state. Use tax normally applies to purchases made from outside the state that are delivered or brought into the home state for “use” within that state. If an out of state seller collects your in-state tax, they are usually collecting the use tax that you would pay, even though they call it sales tax.

But if no tax is collected, then you owe use tax (unless you live in Oregon, Montana, New Hampshire, Alaska or Delaware). Rarely is this enforced on individuals unless you buy a boat or some other large asset. Normally, use tax audits are performed on businesses who have detailed records of their purchases.

However, Washington (the state) once audited bank records to get credit card purchase information to see which of their residents purchased large items from Oregon (a non-taxable state). So as technology grows and the states grow short of money, look for more and more use tax assessments against individuals.

In New York the situation is also the same. If you buy something in state, you pay sales tax on it. If you buy something out of state and bring it into New York, you’re supposed to pay use tax on it. You are, however, allowed to take a credit against your use tax of any sales tax paid to another state.

Let’s say I buy a car in New Jersey where the tax rate is 6% for $10,000. I will pay New Jersey sales tax of $600. If I want to register that car in New York in a county where the sales tax is 8 1/4%, I will have to pay New York an additional $225 ($825 minus the $600 already paid to New Jersey) in use tax before the Department of Motor Vehicles will register it.

Theoretically, you should pay use tax on any purchase that you bring in from out of state. Realistically, it doesn’t happen on purchases of relatively small items. However, on things that have to be registered like cars and boats, the state will make sure that the appropriate use tax is paid before issuing a registration.

In addition, the state will sometimes try to enforce the use tax laws. A common situation here is that New York tax agents will watch for people with New York license plates that buy things at the Ikea in Elizabeth, New Jersey which is in a special enterprise zone with a sales tax of only 3%. Then they can make inquiries to assure that the appropriate use tax is paid if the goods are used in New York.

I heard this on the news several years ago, basically a NYS tax collector went to Ikea and noted all the NY license plates and left a note on the cars stating that they are suppose to pay the tax, IIRC the news contacted the NYS tax man and the tax man said that it was just an overzelious employee and nothing would come of it.

Heh. Indeed. Tyco’s ex-chief is in deep water, with the state alleging he evaded state sales tax on art bought here in town and the use tax on art bought in London and shipped here.

OK, back a few years ago, some States though they could put a sales tax on out of state purchases. CA was one of 'em. SCOTUS whacked their pee-pees over this. So, they changed a few words, and the name to “use tax” and they think it’ll fly. IMHO, SCOTUS will apply the “duck” rule to this when it gets to them (“if it walks like a duck…”). Until that happens, most States have it on the statues, but daren’t strongly enforce it, as they probably have Counsel that told them that very same thing.

So sdimbert- the answer is “legally- maybe, I dunno”. But in practice, you’re OK. However, IF the purpose for buying it in another State was soley to avoid the tax, then they have a point.

It can get pretty confusing. I took phone orders in catalog sales for a while and we were required to charge sales tax on ship-to addresses for any state that had a sales tax.

Sometimes you got a break, though. If an Alaskan customer bought walked into a Washington State retail store, we wouldn’t charge them Washington State sales tax, since the merchandise was going to end up in a state that didn’t charge sales tax. (The customer could prove that he was an Alaskan resident with his drivers license)

Oregon is a popular shopping destination because there is no sales tax. About 7 years ago a co-worker needed a new refrigerator and decided to buy one in Oregon to save money on sales tax. Shortly after crossing back into Washington on his way home, he was pulled over by an officer for the Washington Department of Revenue. The officer noticed the large box in the back of the pickup truck. Besides having to pay the sales tax, he was also slapped with a $250 fine. The state of Washington has DOR offices near most major border crossings and as a upstanding resident of the state, you are expected to stop and pay your taxes when you bring untaxed goods into the state. Also, most retail businesses in Oregon will gladly add the Washington state sales tax to your purchase, all you have to do is ask.

Actually, this is incorrect. First of all, use taxes have been around approximately as long as sales taxes, decades at least. They’re not a recent change to sales tax laws after the Supreme Court decision that I think you’re referring to. I don’t know of any Constitutional challenge to state use tax laws that has been sustained.

Second, the Supreme Court decision had to do with requiring out of state merchants to COLLECT sales tax for states in which they were not located. The Supreme Court held that states could not force merchants over which they did not otherwise have jurisdiction to collect sales tax on their behalf. This in no way limited the ability of states to charge use tax on personal property brought into their borders.

Thank you manny for mentioning Dennis Kozlowski, former Tyco CEO. I was wracking my brains trying to remember which of the disgraced chief executives was busted on sales/use tax charges. Anyway, he’s a good example of someone charged with use tax violations.

In some states, at least. They only appeared in Ohio within the past year. Caused quite a stink, too.

My experience is essentially limited to New York, where use tax has been around approximately forever. I didn’t realize that some other states had recently implemented use tax.

Indeed, here we’ve also had “use tax” since time immemorial (or at least since before 1957). (Of course, here we have the peculiarity that we are on an island, so stuff that arrives in such a manner that a bill of shipping had to be filled, can’t avoid it. But individuals who bring in merchandise from elsewhere in the USA in their baggage are supposed to pay a use tax. 1 guess as to level of compliance.) As Bildo comments, the only major challenges have been as to whether specific private parties along the sales chain can be forced to become collecting agencies.

One justifying rationalization for use taxes is that this protects local merchants by making the expense of buying out-of-state closer to that in-state.

Nowadays the big brouhaha is with e-commerce. In the early 90s it was agreed that until they could figure out a way for the states to get theirs w/o making an unholy mess of everything, they’d allow it continue to work as did mail-order traditionally: a merchant need only collect sales tax on sales to the state(s) where it’s physically located, everyone else to try and collect use tax. They’re still working on it, the trend is towards at least having A state sales tax be payable no matter where the order is filed or filled.

Businesses in Ohio have always been required to file use tax (at least for the past 10 years) What is happening now, with increased internet sales and out of state purchases is that state legislators are starting to figure out ways to enforce the use tax on consumer purchases. I believe that the initial request in Ohio was basically an honor system type thing. The same thing is now being discussed here in Illinois.