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.
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 5% on the purchase.
But no!
If you first use the computer in Massachusetts, then your business owes
Massachusetts 5% 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 1% use tax to Massachusetts - i.e., the difference
between 5% 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 5% 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 5% 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 by filing Form TA-1 with the Massachusetts Department of Revenue. You
can do this on-line now, too.
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! In a bid to close its yawning
budget gap, Massachusetts is adding lines to personal tax returns for 2002
that give us the opportunity of paying 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.