State taxes can trip up Americans
traveling -- and buying -- abroad
By Kay Bell • Bankrate.com

If you plan on bringing back suitcases full of stuffed koalas from your trip Down Under, don't breathe too easy after clearing U.S. Customs. Your state tax collector probably wants to talk.

Everyone knows about sales taxes, that pesky amount you pay in 45 states and the District of Columbia when you purchase most items. What folks don't usually know, however, is that every state that collects a sales tax also imposes a use tax.

A use tax is basically a sales tax on merchandise purchased beyond a state's sales tax boundaries. It is the same rate as the state's sales tax and consumers must pay it on any merchandise they will use within their home state, but which they bought sales-tax-free from an out-of-state -- or foreign -- merchant. You generally get credit for the sales tax you paid to another state, but taxes paid to a foreign country don't count for the purpose of lessening your use tax obligation.

State enforcement of use taxes historically has been negligible. States routinely try to inform citizens about this tax, but follow-up to ensure its collection is difficult and therefore rare.

Use taxes can bolster state coffers
But with federal lawmakers promising national tax cuts, states face the possibility that financial support from Washington, D.C., will shrink. Add to that the sales tax money lost to Internet transactions and state officials are becoming more aggressive in finding ways to make up treasury shortfalls.

So use taxes are a prime state tax collection target. And free-spending American tourists abroad are smack in the bulls-eye.

Just ask New York City resident Warren J. Grossman.

Grossman returned home from a trip abroad in the fall of 1997 with more than $1,500 worth of purchases, mainly gifts for family members living in Connecticut and Maine. The next May, he received a bill from the New York Department of Revenue. Grossman contested the assessment, pointing out that he never "used" the merchandise in New York at all – he sent the items, unused, to their intended recipients within a week of arriving back home.

A New York administrative law judge, however, ruled that simply storing the items in his home and then sending them on to out-of-state family members was enough to make Grossman liable for use tax.

Tracking out-of-state purchases
Tax specialists with CCH Incorporated, a provider of tax data and software, caution that Grossman's predicament could become more common nationwide.

John Logan, senior state tax analyst for CCH, points out that states already have mechanisms in place for collecting use taxes from businesses and they have a legal right to collect use taxes on individual purchasers if they can document the out-of-state transactions. For example, since cars, boats and other vehicles must be licensed, it's easy for state tax collectors to send owners who buy out-of-state a bill before the property can be registered in their home state.

When it comes to foreign travel, the documentation comes to states courtesy of customs' declarations. The U.S. Customs Service routinely passes on to state agencies the information travelers disclose on their declaration forms.

Count local taxes when considering bargains
And depending on where travelers live, they might have to fork over as much as 7 percent of the value of foreign merchandise to their home tax collector as state use taxes -- or even more where counties and cities also tack on use taxes.

That means, Logan notes, travelers will have to make tax allowances in judging the true cost of foreign purchases.

"You shouldn't try to avoid use tax by falsifying your customs declaration because that can expose you to serious penalties," Logan warns. "Just factor in your state's use tax when you go looking for bargains overseas."

To find out how much of a bite your state will take, check this table of state and local tax rates.

-- Updated May 9, 2003