What the heck is use tax? Unless you work in an industry like manufacturing that frequently deals with use tax, you may not know. However, when it comes to use tax, ignorance is not bliss. Use tax errors are a frequent cause of penalties in tax audits.
Use tax, consumers, and states
Use tax is often owed when sales tax isn’t charged on an item. For example, if you buy something online from a vendor that doesn’t charge tax, you will often owe use tax in the jurisdiction where you live. Yet because most states don’t have the resources to track your personal shopping, it’s not a tax that many consumers go out of their way to pay.
Use tax and Internet sales tax
Use tax is technically a type of excise tax. We’ve seen excise taxes before when looking at oil in Alabama, and alcohol, cigarettes and gasoline all over the place. As noted, use tax–which is often left up to the end user to calculate and pay–is notoriously difficult for states to collect. This is one reason many states support a federal Internet sales tax law. They argue it would allow them to capture missing revenue by requiring more out of state businesses to collect sales tax up front (as opposed to waiting for consumers to pay the tax on their own).
Does your business owe use tax?
Businesses can also owe use tax when they make purchases where sales tax is not collected. In addition, some states, such as Colorado, require remote businesses to notify customers of their use tax obligations.
Watch the video below to learn more about whether or not your business might owe use tax.