A taxing problem: What is a Use Tax, anc What Does it Mean for You?

• Author: Thon, Nikki

While almost everyone has heard of sales tax, many business owners are unaware that most states have a "use tax," State laws treat sales and use tax as two separate taxes, but in reality they act in concert to complement each other. Think of them as a "pay me now" or a ((pay me later" tax.

Sales Tax vs. Use Tax

Sales tax, the "pay me now" tax, is paid to a retailer at the time of purchase. Generally speaking, traditional brick and mortar stores are required to collect state and local sales tax on retail sales. Many online retailers are not required to collect sales taxes on sales shipped to another state simply because they do not have a taxable presence there (typically property or employees).

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Use tax, the "pay me later" tax, is required to be remitted by the purchaser for taxable transactions where the seller did not charge sales tax (i.e., internet sales). Many purchasers are either unaware of this requirement or choose to ignore it. Some states provide clear guidance and a convenient method for remitting the tax (e.g., line item on the state sales tax return), while other states provide little to no guidance coupled with confusing remittance methods.

To summarize, if the transaction is taxable, and not taxed at the time of sale, the corresponding use tax is likely due from the purchaser. For example, when a Minneapolis restaurant owner purchases new dishes at a Minnesota restaurant supply company (deemed a taxable sale), Minnesota sales tax would be due. However, if the dishes were purchased over the Internet from a Wyoming retailer and the retailer was not required to collect Minnesota sales tax, the restaurant would be required to self-assess and remit the applicable use tax to Minnesota.

Marketplace Fairness Act

States have struggled with use tax collection and are looking to the Marketplace Fairness Act as a mechanism to increase sales and use tax compliance.

Last year, the Senate passed the Marketplace Fairness Act (MFA), which would allow state governments to require retailers without a physical presence in the state of the purchaser to collect that state's sales tax. The bill has been referred to a House of...