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Don’t overlook your state use tax

By Kay Bell ·
Thursday, July 29, 2010
Posted: 2 pm ET

Are you psyched for the sales tax holiday in your state? Enjoy.

But if you're planning to go tax-free shopping in a neighboring state, you might want to reconsider. You'll likely owe your own state a use tax on your out-of-state purchases.

Use taxes are the companions to state sales taxes. They are assessed on otherwise tax-free items purchased in one state but brought by they buyer back to their home state where they'll, in legalese, "use, store or consume the goods."

A use tax is usually the same rate as a state's sales tax that would have been owed if the same goods had been purchased in the buyer's state of residence.

Even if you pay a sales tax in one state, you generally are obligated to pay any difference in the tax to your home state if its tax rate is greater that the one where you purchased the item.

A U.S. senator this week has been at the center of a potential use tax controversy.

Sen. John Kerry, D-Mass., bought a new $7 million sloop. Kerry purchased his boat in Rhode Island (technically, he had it built there), which no longer collects sales taxes on yachts. Kerry's yacht, christened Isabel, has been berthed in Rhode Island since the purchase.

But folks in Massachusetts, which Kerry represents in Congress, are a bit ticked off by the cross-state tax savings.

If Kerry had purchased the Isabel in the Bay State, he would have paid Massachusetts' 6.25 percent sales tax, along with an annual excise tax on luxury watercraft.

And some are concerned that he might surreptitiously sail her into Massachusetts waters without the state tax department's knowledge, thereby avoiding the state's use tax. That's probably a valid concern, since I doubt that the Massachusetts Department of Revenue has a seafaring division.

After several days of negative publicity, Kerry announced he's going to pay all applicable Massachusetts taxes, the total of which comes to around $500,000. But he's the exception.

Most folks who buy items in other states and bring them home to their regular tax residences don't worry about use taxes.

States still try, though, to collect the money. Take Alabama, which is one of the states with a back-to-school sales tax holiday this year. Although it's giving shoppers some tax saving that way, tax officials there want to make sure that Alabama residents know they could owe the state if they buy items in other states. There's even a specific "Consumer Use Tax" line on the Alabama individual income tax return.

Even states that don't collect annual income taxes from residents want their proper use tax payments. Take my home state. We don't pay income tax here in Texas, but the Lone Star State tax office still wants us to send in the appropriate use tax amount via a special form if we buy products elsewhere.

Now I don't expect all y'all to head straight to your state's tax office and hand over any use taxes you owe. You should if you bought items elsewhere, but I don't expect it.

But I did want you to know that use taxes are the law in most states.

Just remember that the next time you complain about some tax scofflaw getting off while you're paying your fair share. You, too, might be one of those fold cheating your state tax collector.

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