Every state that charges a sales tax, also charges a use tax. This discussion focuses on Massachusetts use tax, but should generally apply to other states as well. This is general information intended only as an orientation for interested taxpayers. If you are a client of John Schachter + Associates, we will be happy to answer any questions you may have in more detail and with greater precision.
WHAT IS USE TAX?
Here’s the deal:
Imagine you order a new computer for your business from an on-line retailer. Because the retailer is out of state and has no assets or employees in Massachusetts, you are charged no sales tax. You are psyched, because you think you have saved 6.25% on the purchase.
If you first use the computer in Massachusetts, then your business owes Massachusetts 6.25% of the purchase price as a “use tax’.
Imagine you buy the computer and DO pay sales tax, in a state that charges such tax at 4%.
In this case, if you make first use of the computer in Massachusetts, then you will owe 2.25% use tax to Massachusetts – i.e., the difference between 6.25% and what you already paid in the other state.
Imagine you go to New York City and buy the computer, paying 8.25% sales tax.
In this case, you will NOT owe Massachusetts anything. You already paid at least 6.25% elsewhere.
If the purchase is otherwise deductible on your income tax return, then the use tax paid will be deductible as well.
Note: if the purchase would be sales tax exempt in Massachusetts, then no use tax will apply. For example, food purchases are sales tax exempt in Massachusetts. So you could buy a turkey in New Hampshire and bring it to Massachusetts for Thanksgiving dinner free of use tax.
Also note: purchases in foreign countries are also subject to use tax. So much for the jaunt to Canada!
HOW YOU REPORT USE TAX
If you are a sales tax vendor, then you are already filling out sales tax returns, telling Massachusetts the amount of your taxable sales, and figuring how much you owe in sales tax on such sales.
Nestled among the boxes on the form is one captioned “Use Tax Purchases’. This is where you are supposed to enter the value of un-taxed purchases of non-exempt goods first used in Massachusetts.
As you follow along the form, you will end up figuring and paying 6.25% on such purchases.
WHAT IF I DO NOT COLLECT SALES TAX IN MY BUSINESS?
Then your business is supposed to register as a use tax purchaser. You do this at the Massachusetts Department of Revenue Web File for Business site.
WHAT IF I HAVEN’T DONE THIS?
Massachusetts has three years from the date a non-fraudulent sales/use tax return is filed to audit it. If you truly didn’t know that you owed use tax, there should be no way you could be required to pay it for periods where you filed a return and three years or more have passed.
You COULD be audited with respect to the most recent three years, however!
If you NEVER file sales or use tax returns – for example, you are in a service business where sales tax is never collected from your clients – the Massachusetts has FOREVER to audit you for periods for which you never filed a return.
Since the use tax started in the 1960s, Massachusetts could go way, way back looking for such liabilities.
You can start the three-year clock ticking by filing now.
I AM NOT A BUSINESS PERSON. DO I PAY USE TAX?
You are supposed to! A line on your personal tax return gives the opportunity to pay this additional tax. Aren’t you glad?
GEE, I MIGHT BE IN TROUBLE HERE
Remember the first rule of tax accounting: do not be afraid! Any such problems can be solved – but only if you deal with them.