Buying from Out-of-State: The Pitfalls of Use Tax

I was talking with a prospective customer yesterday and she mentioned she was a little disappointed that she had a sales tax audit and found out that she owed over $6,000, well let’s talk a little bit about why.

Use Tax

She said her accountant really never told her about use tax. It is a form of sales tax in a voluntary situation, and I say voluntary, it’s not really voluntary, you’re mandated to pay it but you have to volunteer the information on your tax return.

So it happens when a vendor that you make a purchase from is not required to collect sales tax in your state.

Maybe they operate in another state and they have no presence in your state, so they’re not required to deal with your state’s laws.

It’s a hefty burden if a vendor has to comply with 50 states worth of sales tax laws and most don’t, but e-commerce gets complicated in that way.

What you should do?

However if you see on an invoice from a purchase that you made from an out-of-state vendor that you did not pay sales tax, first consider is this something you’re going to re-sell? If you’re going to resell it, you don’t need to pay sales tax when you purchase it.

You’ll just collect it from the final end user of the product but if this is something that you are the end-user on, you need to file and pay use tax.

So if you’re filing a monthly or quarterly sales tax return, you’ll find a line on most every state’s returns where you pay use tax. It’s basically paying the sales tax, but instead of paying it to the vendor, you’re going to pay it directly to your home state.

If you don’t see it there, there may be a separate return for your state and individuals actually are required to pay this as well, there’s usually a line on their filing income tax return for personal that asks about this tax.

Watch Out!

Most people don’t know what it is when they see it, so there are a lot of zeros there, but watch out.

So if you purchase something out-of-state, you are required to still pay sales tax on that unless you have a valid reason for an exemption like reselling an item.

So watch out, make sure you’re filing your use tax on time and don’t have a crisis by having a sales tax audit.


For additional read: Tax Strategies and Tax Preparation are not the same. Here’s Why.

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Donna Bordeaux, CPA with Campground Accounting

Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.

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