What is Use Tax?

Peter VanderWoude, CPA, CGMA

July 1, 2016

Prior to the internet shopping boom, many saavy people in our area of New York State used to enjoy shopping at the outlet stores in Reading, Pennsylvania. There was a large selection of goods, low prices and…the icing on the cake…no Pennsylvania sales tax on clothing.

As these folks drove back home up I-81 and crossed the state border, those bags of clothing purchased without sales tax now have “Use Tax” due on them, payable to New York State. If told that back then, probably most people would have exclaimed, “you’re kidding me!” “How is the state going to know?”

Use tax is a version of sales tax. It get’s its name from the circumstance where a business that normally sells a product at retail, actually uses that product for themselves. An example would be cleaning supplies purchased at wholesale by a retail store, the stage where sales tax is not collected, then not sold through the store, but “used” in the business to clean the premises.

Imagine the surprise of some unlucky Reading, PA shoppers who got a use tax due letter from New York State. How? Well, our state is saavy, too. They used to send state employees to the Reading outlet’s parking lots and have them record New York State license plate numbers.

Then the state would send an estimated tax bill to the owners of the vehicles. Tricky!

With online retail shopping, states have lost a great deal of sales tax revenue to cross border retail purchases by its residents. Efforts are being made to have out-of-state retailers collect sales tax, but it is complicated to accomplish.

Until recently, there was not a convenient way to pay Use Tax. That has changed. On New York’s income tax form there is a line to self-report sales and use tax due for out-of-state retail purchases made during the tax year.

The easy way to handle all this? Buy here in New York or from online retailers like Amazon that collect New York State sales tax.

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