The Skinny on New York’s Use Tax
- Oct 16, 2013 | Gail Cole
In states with a sales tax, like New York, use tax is owed on the transfer of taxable items when sales tax isn’t collected at the time of sale. Sales tax is usually not collected for one of two reasons:
- The out-of-state retailer does not have nexus and is not required to collect sales tax; or
- The buyer purchased the item in a state without sales tax.
When no sales tax was paid at the time of sale, the amount of use tax owed is usually easy to calculate: a jurisdiction’s use tax rate is generally the same as its rate of sales tax, and the full amount is owed.
Sometimes, however, a buyer makes a purchase in a state or local tax jurisdiction with a lower rate or higher of sales tax than the one in which he lives. When sales tax is paid but the rate is less than the rate in the jurisdiction where the item is used, the difference may be owed to the resident state. This can be confusing to consumers, many of which are businesses.
Fortunately, the New York State Department of Taxation and Finance recently released a helpful tax bulletin explaining reciprocal credit for sales or use taxes paid to other taxing jurisdictions.
The bulletin points out that a person “may be considered a resident for sales and use tax purposes even if you are not considered a resident for personal income tax purposes.” For example, people in the following situations are considered a resident for sales and use tax purposes:
- A person maintaining a permanent place of abode in NY who spends 183 days or less in the state;
- A person engaging in any manner in of employment, trade, business or profession in New York;
- A college student attending an institution located in NY; and
- A member of the military stationed in New York.
Residents are required to pay the 4% state sales tax plus any applicable local taxes. Use tax payments should be submitted directly to the New York Tax Department.
A reciprocal credit for sales or use taxes paid to a tax jurisdiction other than the one in which a person resides may be available if all the following conditions are met:
- The state/locality where the purchase was made allows a corresponding credit for sales or use tax paid to NY State and New York localities (the “Scratch my back and I’ll scratch your back” approach);
- The purchaser was legally liable for the (sales or use) tax paid and paid the (sales or use)tax to the other state and or locality;
- The purchaser has no right to a refund or credit of the tax paid to the other state/locality; and
- The purchaser has proof of payment, such as a receipt showing the amount or rate of tax paid to the other state /locality.
Scratch that back
New York may allow reciprocal credit for:
- Both state and local sales and use taxes paid in another state;
- Only state sales and use taxes paid in another state; or
- Only local sales and use taxes paid in another state.
Full reciprocal credit is allowed with states that allow full reciprocal credit with New York. If the combined rate of state and local sales tax in the other state is less than New York’s, the difference is owed. If the combined rate of state and local tax is more than New York, too bad for you. New York won’t refund the difference.
Some states allow reciprocal credit for only the state portion of sales tax. That’s how New York rolls when dealing with purchases from those states.
Some states allow reciprocal credit for only the local portion of sales tax. New York responds in kind.
To claim a reciprocal credit, New York residents must:
- Show proof of payment to the other state, including rate of sales or use tax paid;
- Show that the state or locality where the purchase was made allows a credit for sales or use tax paid to New York State and localities;
- Show the buyer is legally liable for the tax and paid the tax to the other state/locality; and
- Show that the buyer has no right to a refund or credit of the tax paid to the other state/locality.
Don’t take reciprocal credit for granted
Let it be clear that “reciprocal credit is not automatically allowed just because some amount of money labeled as tax was paid to another state.” Specific criteria, listed above and on the tax bulletin, must be met.
The tax bulletin provides an interesting example: A New York resident buys a painting in State A and pays a 5% surcharge on the sale that State A imposes on the seller (and the seller passes through to the buyer). The surcharge is not a sales or use tax. Therefore, when the painting is hung on the resident’s wall in New York, the buyer must pay the combined New York state and local sales tax rate of 8% on the price of the painting. That might seem like paying the same tax twice, but the New York Department of Taxation and Finance says that’s the way it has to be.
Other interesting examples for other situations are described in the tax bulletin. It makes for a good read. Really. Law –abiding residents of New York should read it and comply with New York’s use tax law, taking advantage of the reciprocal use tax credit where allowed.
Businesses may want to consider outsourcing and automating their sales and use tax system.
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