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What is a use tax?
A use tax is very similar to a sales tax; however, it targets purchases made outside of a given tax jurisdiction. Use taxes are levied on goods or services bought in one state or municipality, then transported into, consumed in, or resold in another municipality or state. Use taxes aim to preserve sales tax revenues and protect local retailers from competition in jurisdictions with lower sales taxes or no sales taxes.
In the United States, 45 states plus the District of Columbia, Puerto Rico, and Guam charge sales tax. Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — do not charge any statewide sales taxes. Many of the 45 states that impose sales taxes also charge use taxes on purchases made in different states. In addition, many counties and cities charge varying sales tax rates, and levy use taxes on purchases made outside their jurisdictions to make up for lower tax rates paid on such purchases.
Use taxes are generally charged at exactly the same rate as sales taxes: Massachusetts charges a state-wide sales tax of 6.25 percent and a use tax of 6.25 percent on most out-of-state purchases. Many states grant tax credits to defray use taxes for the amount of sales taxes paid in other states. Massachusetts charges a 6.25 percent use tax, but any amount of sales or use taxes charged in a second state up to a rate of 6.25 percent are credited to the buyer for local use taxes.
Transactions subject to a use tax vary by state, but both companies and individuals are subject to the payment of use taxes. Types of transactions subject to taxation include:
- Mail order: If you live in a state subject to sales tax and purchase from a mail-order company based in a state that does not have a sales tax or has a lower sales tax rate, the order may be subject to a use tax.
- Deliveries: Deliveries from an out-of-state company that does not collect sales taxes when shipping goods to another state may require use taxes.
- Transactions: Any taxable transaction with a merchant in a state that requires the payment of a sales tax where the merchant receives an exemption from the purchaser may require a use tax.
- Purchases: When an in-state or out-of-state merchant neglects to collect sales tax, even if mandatory, it may trigger a use tax.
Many states offer use tax exemptions, depending on the type of customer or the intended use of the goods or services. Infrequent and nonrecurring transactions by people or businesses who do not regularly buy out of state are generally exempt from the use tax. Other exemptions include:
- Manufacturing: Certain goods purchased for manufacturing are subject to varying exemptions.
- Government: The federal government and state governments are exempt from use taxes.
- Nonprofits: Nonprofit organizations that fall under the Internal Revenue Code 501(c).
Use taxes have become a major issue for online sales, as many online retailers charge neither sales taxes nor use taxes. State laws sometimes exempt online retailers from collecting sales taxes on items if they do not maintain a physical presence in a state.
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Use tax example
The State of Pennsylvania charges a 6 percent sales tax on most purchases made in the state. Martin lives in Philadelphia and buys an antique bible from a website that does not collect Pennsylvania state sales tax. Martin owes a use tax of 6 percent of purchase price of the book, and an additional 2 percent local use tax for the city of Philadelphia.