Use TaxEdit
Use tax is a tax on the storage, use, or consumption of tangible personal property within a state when sales tax was not collected at the point of purchase. It is designed to capture revenue that would otherwise escape the state’s tax base when residents buy goods from out-of-state vendors or from merchants that do not collect the tax at the time of sale. In practice, use tax functions as a counterpart to the sales tax, applied at roughly the same rate and on a similar range of goods, but enforced on the consumer rather than the seller in many situations. The policy aim is simple: to prevent tax avoidance, protect state revenues, and maintain a level playing field for in-state businesses that must collect sales tax.
Historically, use tax emerged alongside sales tax as states sought to preserve their ability to fund core services as commerce grew beyond borders. The rise of mail-order catalogs and, later, internet commerce highlighted gaps in tax collection when purchases were made from distant merchants. Over time, states crafted use tax rules to close those gaps, often by requiring individuals to report and remit use tax on purchases for which sales tax wasn’t collected. The legal and practical landscape has evolved further with major court decisions and legislative reforms designed to widen tax collection reach without unduly burdening residents or small businesses.
How use tax works
- What it taxes: Use tax generally applies to tangible personal property that is used, stored, or consumed in the state. In many jurisdictions, the base is aligned with the sales tax rate and exemptions, though the specifics vary by state. For example, a consumer who buys a desk from a distant retailer might owe use tax if the seller did not collect sales tax at the time of sale.
- Who owes it: Consumers typically owe use tax directly to the state, though in practice many purchases are self-reported on annual tax returns or through separate use tax forms. In recent years, many states have shifted this burden onto marketplace platforms, which collect use tax on behalf of sellers under marketplace-facilitator laws.
- How it is collected: The administrative approach differs by state. Some require consumers to self-report on income or use tax forms; others rely on sellers or marketplace facilitators to collect and remit tax for out-of-state transactions. The rise of marketplace facilitators has reduced the friction of compliance for individuals and simplified administration for states.
- Relationship to sales tax: Use tax and sales tax are designed to complement one another. If a retailer charges sales tax at the time of purchase, no use tax is ordinarily due for that transaction. If no sales tax is collected, use tax serves as a backstop to preserve revenue and ensure parity between in-state and out-of-state purchases.
Scope, exemptions, and variations
The specifics of use tax vary by jurisdiction. Most states tax tangible personal property, but the breadth of what is taxable and what is exempt can differ. Common exemptions include groceries, prescription medicines, and certain durable goods or services, though many states tax some digital or otherwise non-tangible items differently. Some states have broad use taxes that cover a wide range of consumer goods, while others narrow the scope. When policy makers introduce exemptions or carve-outs, they are weighing revenue stability against the desire to reduce tax burdens on households and encourage certain kinds of spending.
In practice, use tax rules reflect a broader tax design philosophy: keep the overall tax system simple and predictable, while maintaining competitive neutrality between residents who buy locally and those who shop elsewhere. This is particularly relevant in states with no income tax or with aggressive efforts to bound tax rates on consumption.
Modern debates and controversies
- Tax fairness and the competitive playing field: Proponents argue that use tax helps level the field for in-state retailers that must collect tax while competing against out-of-state merchants that might otherwise evade the tax. By closing that gap, use tax reduces distortion in consumer choices and protects public services funded by taxation. Critics sometimes contend that use tax is too complex or too rarely enforced, making it an ill-fit for a modern, digital economy. From a policy perspective, the key question is whether the system is simple enough to be enforceable and broadly complied with, while preserving revenue stability.
- Compliance costs and administrative burden: A common critique is that use tax can impose significant record-keeping and reporting requirements on individuals and small businesses. The counterargument emphasizes efficiency gains when a marketplace platform collects on behalf of sellers, reducing friction for ordinary consumers and ensuring consistent treatment across purchases.
- The internet and remote shopping: The legal and practical landscape shifted dramatically after decisions that permitted states to pursue taxes from remote sellers with economic nexus rules. This has changed incentives for both consumers and sellers and has been reflected in marketplace-facilitator regimes. In this sense, use tax policies are often debated as a tool to modernize tax collection in a digital economy while avoiding overbearing bureaucracy that would hamper growth.
- Regressivity concerns: Critics sometimes raise concerns that consumption taxes, including use tax, disproportionately affect lower-income households because these households tend to spend a larger share of their income on taxable goods. The common rebuttal is that use tax should be designed to be as simple as possible to capture tax from all purchases that would otherwise go untaxed, while offering targeted exemptions to necessities. Proponents of broad tax bases argue that a simpler, lower-rate system can be more efficient and less distortionary than a patchwork of special rules.
Woke or progressive critiques of use tax often focus on equity, administrative fairness, or the burden on consumers who lack easy access to information about tax obligations. A robust defense from those who favor market-friendly tax design is that use tax, when implemented with simplicity and reliable collection mechanisms (like marketplace facilitators), promotes fair competition, helps fund essential government functions, and reduces avoidance without creating unnecessary compliance traps for ordinary households. In this frame, criticisms that miss the basic mechanics or that overstate administrative burdens can be seen as overstated or misdirected.
Administration and policy design
- Marketplace facilitators: Many states now require online marketplaces to collect and remit use tax on behalf of third-party sellers. This approach shifts the compliance burden away from individual buyers and toward platforms that aggregate vast numbers of transactions. The result is more consistent revenue and fewer opportunities for evasion.
- Rate consistency and exemptions: To minimize confusion, policymakers often align use tax with sales tax rates and try to harmonize exemptions where possible. Simplicity helps with voluntary compliance and reduces administrative costs for both taxpayers and tax authorities.
- Cross-border considerations: Use tax policies must address cross-border shopping realities. By ensuring that purchases from out-of-state vendors are taxed consistently, states aim to preserve the integrity of the tax base without stifling legitimate commerce across borders.
- Revenue and budgeting: Use tax provides an integral source of revenue for state and local governments, contributing to funding for services and infrastructure that support a stable economy. The predictability of tax receipts is a key consideration in budgeting and fiscal planning.