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A use tax is a type of tax levied in the United States by numerous state governments. It is essentially the same as a sales tax but is applied not where a product or service was sold but where a merchant bought a product or service and then converted it for its own use, without having paid tax when it was initially purchased. Use taxes are functionally equivalent to sales taxes. They are typically levied upon the use, storage, enjoyment, or other consumption in the state of tangible personal property that has not been subjected to a sales tax.[1]

Introduction

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Use tax is assessed upon tangible personal property and taxable services purchased by a resident or entity doing business in the taxing state upon the use, storage, enjoyment or consumption of the good or service, regardless of origin of the purchase. Use taxes are designed to discourage the purchase of products that are not subject to the sales tax within a taxing jurisdiction.[2] Use tax may be applied to purchases from out-of-state vendors that are not required to collect tax on their sales within the state. The use tax imposes a compensating tax equal in amount to the sales tax that would have been imposed on the sale of the property, if the sale had occurred within the state's taxing jurisdiction.[3] The use tax is typically assessed at the same rate as the sales tax that would have been owed, and generally the taxability of the good or service does not vary. However, there are some instances where the sales tax rate and the use tax rate vary.

For example, a resident of Massachusetts, with a 6.25% "sales and use tax" on certain goods and services, purchases non-exempt goods or services in New Hampshire for use, storage or other consumption in Massachusetts. Under New Hampshire law, the New Hampshire vendor collects no sales taxes on the goods, but the Massachusetts purchaser/user must still pay 6.25% of the sales price directly to the Department of Revenue in Massachusetts as a use tax. If the same goods are purchased in a US state that does collect sales tax for such goods at time of purchase, whatever taxes were paid by the purchaser to that state can be deducted (as a tax credit) from the 6.25% owed for subsequent use, storage or consumption in Massachusetts. With few exceptions, no state's vendors will charge the native state's sales tax on goods shipped out of state, meaning all goods ordered from out-of-state are essentially free of sales tax. The purchaser is therefore required to declare and pay the use tax to his home state on these ordered goods.

The assessing jurisdiction may make the use tax payable annually, but some states require a monthly payment. For example, where a Vermont resident has not paid at least 6% sales tax on property brought in for use in the state, Vermont law requires filing a tax return (Form SU-452 and payment) by the 20th day of the month following non-exempt purchases to avoid a $50 late fee, a 5% penalty per month, to a maximum of 25%, plus statutory interest on the unpaid tax and penalties.

There are currently over 14,000 tax jurisdictions in the U.S. and many of these jurisdictions have varying taxability on services. Given the volume of jurisdictions, the source of the sale may also need to be examined, in order to appropriately apply and remit the tax. For instance, states may require use tax based upon the location in which the service was provided, while other states may require use tax based upon the location of "benefit". In traditional repair and maintenance type services, these locations will typically be one and the same, however with complex technology transactions, these locations are often different.

In most cases, this complexity is part of the underlying sales tax laws; but while a brick-and-mortar store has to deal with only the sales tax laws of its own location, remote sellers have to deal with the use tax laws of many jurisdictions—up to every US state and locality that assesses them, if the company has a presence or "nexus" in every state (as large "brick-and-mortar" sellers like Wal-Mart and Best Buy do).

Self-assessment

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The use tax, like the sales tax, is assessed upon the end consumer of the tangible property or service, but the difference is who calculates the tax and how it is accounted for. The sales tax is collected by the seller, who is acting as an agent of the state and thus remits the tax to the state on behalf of the end consumer. On the other hand, the use tax is self-assessed and remitted by the end consumer. From an entity's perspective, the shift from sales to use tax is the equivalent of shifting from an expense account (profit and loss statement implication) to a liability account (balance sheet implication).

To illustrate sales tax, if company XYZ, Inc. purchased $40 of office supplies from an in-state vendor that collected $10 of sales tax:

General ledger account Debit Credit
Office supplies $50
Cash $50

To illustrate use tax, if company XYZ, Inc. purchased $40 of office supplies from an out-of-state vendor that did not collect sales tax, use tax is self-assessed:

General ledger account Debit Credit
Office supplies $50
Cash $40
Use Tax Payable $10

The US Census Bureau [4] reported in 2014, $271.3 billion dollars in sales and gross receipts were collected by the 45 states that collect sales and use taxes; 33 of the 45 states increased collections year over year. Sales and use taxes combined account for 32% of all taxes collected by all states, second only to personal income tax collections. The states themselves maintain that use tax collections are the second leading cause of tax deficiencies under audit.[5]

Enforcement

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In 2007, 22 states,[6] including New York, California, Ohio and Virginia have included an entry on their state individual income tax return for taxpayers to voluntarily calculate an amount for use tax liability. Taxpayers, however, have been reluctant to pay taxes to the state. A few of these states have tried another approach by pre-determining the tax liability owed by every taxpayer by a tax table based on the individual's adjusted gross income. For example, a Michigan taxpayer with $45,000 of income can use the state's use tax table[7] to estimate his use tax liability as $36. However, use of this table is limited to purchases of less than $1,000 and may be challenged during an audit. For purchases over $1,000, the taxpayer must calculate the tax for each item and add this amount to the use tax from the table. States using this method have seen an increase in voluntary compliance over those states that have the taxpayers calculate the use tax themselves.

As the amount of e-commerce sales continues to rise ($34 billion for just the second quarter of 2008)[8] states recognize that the key to collecting these taxes rests not only in educating the individual taxpayer but with coordinating their efforts with other states. Currently, there are 19 full member states and 3 associate member states that belong to the Streamlined Sales Tax Project[9] (SSTP). The SSTP assists states in collection of sales and use tax by registering merchants who charge out-of-state consumers the appropriate state sales tax and remit the tax to the appropriate state through a certified service provider. SSTP has also been in the forefront of an effort to push Congress to amend the laws to make collection of sales tax less burdensome. In fact, in May 2013, the United States Senate passed a bill that would give the states authority to require sellers to collect sales tax on out-of-state sales. The House of Representatives must still pass the bill and send it to the President of the United States before it becomes law.[10]

States may also work with adjacent states via interstate use tax agreements.[11] These agreements allow states to exchange tax audit records from businesses that have shipped goods to out of state consumers. Reciprocal states will then use those records and send a tax bill including penalties and interest to the individual taxpayer.

States have also pursued their collection efforts through the court system. In 2007, a California appeals court[12] ruled that Borders Online owed California sales tax for online purchases that the store failed to collect from 1998 to 1999 since customers were able to return merchandise bought on-line to Border's retail stores in California.

Exemptions

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Exemptions are typically offered based upon the type of customer:[13]

  1. Resale - Resale certificates are the most commonly used of the sales tax exemption certificates. Sales taxes are applied to retail sales and so sales for the purpose of reselling are exempt to avoid double taxation. Reselling and wholesaling account for $844 billion of the American GDP, or 3.3%.[14]
  2. Manufacturing - Manufacturing exemption certificates generally apply to manufacturers of tangible personal property, industrial processors, and refineries that produce tangible personal property for sale at retail. Each state outlines specific equipment and/or consumables that are eligible for the exemption. Estimates show (as discussed further in the Statistics Section) that $2.08 trillion and 12.5% of GDP is associated with the manufacturing sector.
  3. Agricultural - Agricultural exemptions are generally applied to sales of tangible property that will be utilized in farming, raising livestock, and maintaining agricultural land. According to the US Department of Agriculture, $412.3 billion of GDP relates to agriculture, and $5.816 trillion of tangible assets are in use for agricultural purposes. Estimates derived from gross sales of sampled states with exemption certificates that were annualized and stratified show that $45 million of state reported gross sales are associated with the agriculture sector.
  4. Government - The federal government is exempt from sales and use taxes per federal statute. Additionally, many states (all except Arizona) exempt their state governments by state statute. Not all states require a certificate for government exemption. Estimates show that approximately $19 trillion gross sales are associated to federal and state governments, which ties to actual reported on GDP reporting.
  5. Exempt Organizations - Exempt organizations are generally defined as they are in Internal Revenue Code §501(c).[15] Additionally, many states require the Internal Revenue Code letter establishing the organization as exempt as a supplement to the exemption certificate. Estimates show that approximately $1.5 billion of gross sales are associated to exempt organizations.
  6. Construction contracting - construction and/or capital improvements may also be exempt per state statute or regulation. There may be different treatment for new construction and capital improvements. Construction contractors may be exempt from paying sales tax upon purchasing but will be required to pay use tax upon incorporation into real property. Construction accounts for $520.3 billion of GDP.[when?]
  7. Aircraft - Aircraft, aircraft parts, and aircraft labor are generally exempt because aircraft are used in multiple states. Air services accounts for $63.3 billion of GDP.[when?]

Exemptions are also offered upon the usage of the property. For instance, the most common types of exemptions are for resellers, who purchase the goods to resell them so they are not the end consumer. Manufacturers are also exempt when they purchase goods that ultimately are incorporated into tangible personal property that is destined for the open market. Again, the manufacturer is not the ultimate consumer of the good. Several states also offer Direct Pay Permits, which are issued to manufacturers allowing them to purchase the goods intended for incorporation into tangible personal property. Such manufacturers may also use the same goods or parts for repair and maintenance of their existing products previously purchased by the end consumer. Thus, the burden of tax liability shifts from the seller of the goods to the manufacturer. The manufacturer will purchase all goods tax exempt with the Direct Pay Permit but is required to accrue and remit tax on goods that are taken from inventory (intended for incorporation into tangible personal property held for sale) and consumed by the manufacturer. That is done because the manufacturer has better visibility to the usage of its property and so is in a better position to determine if use tax should apply.

Direct pay permits

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Direct pay permits are generally used by manufacturers that purchase tangible personal property for resale and their own use. They usually require the seller to exempt the purchases and pay use tax upon removal from inventory. Manufacturers will either use an exemption certificate or will rely on a state issued direct pay permit/agreement.

A direct payment permit allows a business to purchase taxable goods and services without paying tax to the vendor and to remit the correct use tax directly to the DRS. That allows businesses the necessary time to determine how much tax to assess on their purchases.[16]

Burden of proof

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The ultimate burden of responsibility to verify the validity of the exemption lies with the issuer of the certificate. That is, the reseller or manufacturer who provided the certificate to the seller has the burden of proof and the financial responsibility for the tax, penalties, and interest if the proof is not met. The seller, as a collection agent for the state, can be made liable for the uncollected taxes if the burden of proof is not met, as outlined by state law and/or regulation.

There are two principles of proof used by states:

Good faith acceptance is defined as "total absence of intention to seek unfair advantage or to defraud another party; honest intention to fulfil one's obligations; observance of reasonable standards of fair dealing."[17] In practice, that translates to accepting a completed certificate that appears reasonable on its face. For example, reasonableness for a manufacturer of widgets would be the purchase of raw materials such as metals or plastics, tools, etc. The purchase of children's toys or clothing would be unreasonable for the same manufacturer of widgets.

Strict liability acceptance is defined as "Liability that does not depend on actual negligence or intent to harm, but that is based on the breach of an absolute duty to make something safe." [18] Then, the liability of the seller is relieved upon receipt of the certificate, the seller has no obligation to validate the statements made by the purchaser.

See also

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References

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[edit]
Revisions and contributorsEdit on WikipediaRead on Wikipedia

Use tax

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from Grokipedia
Use tax is a imposed by U.S. states on the storage, use, or other consumption of tangible or taxable services within the state when the vendor did not collect and remit the equivalent , typically due to the purchase occurring out-of-state, online, or from an exempt seller. The generally mirrors the state's rate, applied to the purchase price or of the item, ensuring that goods consumed locally bear equivalent fiscal burdens regardless of acquisition origin. Enacted as a complement to sales taxes since , use tax addresses revenue leakage from interstate by requiring consumers or businesses to self-report and pay directly to the state, thereby protecting in-state retailers from competitive disadvantages posed by untaxed out-of-state competitors. Compliance relies on purchaser diligence, with states providing schedules for common items like vehicles or large appliances, though enforcement often involves audits, penalties for nonpayment, and increasing reliance on vendor collection post the 2018 v. decision, which expanded rules for remote sellers. Despite these mechanisms, empirical collection rates remain low—often below 10% for individual filers—highlighting systemic underreporting driven by behavioral avoidance rather than legal exemptions.

Fundamentals

Definition and Purpose

Use tax is a imposed on the storage, use, or consumption of or taxable services within a when the equivalent has not been paid to the vendor at the time of purchase. It applies to items acquired from out-of-state sellers, online retailers without sufficient in the state, or tax-exempt sources, ensuring taxation occurs upon the item's utilization rather than solely at the point of sale. Rates typically match the state's rate, varying by jurisdiction—for instance, 6.25% in as of 2023 or 4% base plus local add-ons in New York. The core purpose of use tax is to complement by eliminating incentives for consumers to evade taxation through cross-border or untaxed purchases, thereby maintaining revenue neutrality and market equity between in-state and out-of-state goods. Without it, residents could systematically avoid state taxes by sourcing from vendors not obligated to collect , distorting competition for local retailers who bear the collection burden and eroding state fiscal bases—estimated losses exceeding $8 billion annually across U.S. states pre-Wayfair ruling in 2018. This mechanism enforces a uniform principle: taxation based on where the good is used, not sold, aligning with causal incidence on end-users rather than intermediaries. Use tax thus serves both protective and revenue-securing functions, safeguarding domestic from undercutting by untaxed imports while capturing fiscal leakage from direct actions like personal imports or acquisitions. It applies broadly to individuals for household goods and to businesses for equipment or supplies, with self-reporting obligations underscoring its role in promoting compliance over evasion. Enacted in most states since the mid-20th century, it addresses inherent limitations in collection amid growing interstate trade.

Relation to Sales Tax

Use tax functions as the complement to by imposing a on the storage, use, or consumption of tangible or taxable services within a state when was not paid at the point of purchase. This mechanism ensures that all intra-state consumption is taxed equivalently, regardless of whether the transaction occurred with an in-state retailer or an out-of-state vendor. For instance, purchases from online sellers lacking sufficient in the buyer's state, or direct imports, trigger use tax liability to prevent revenue loss and competitive disadvantages for local sellers. The rate of use tax mirrors the applicable rate in the , typically ranging from 4% to over 10% when including local add-ons, applied to the purchase price or of the item. This parity avoids while closing gaps exploited by interstate commerce; without use tax, consumers could evade taxation by sourcing from low-tax or non-collecting jurisdictions, undermining the base. Historically, use taxes emerged in the 1930s as es proliferated during the , with enacting the first in 1935 to safeguard in-state merchants from out-of-state and curb . Key distinctions lie in collection and administration: is typically remitted by the seller at the time of sale, whereas use tax requires self-reporting and payment by the purchaser, often annually or with returns. Sellers may also incur "seller's use tax" obligations if they have but fail to collect , shifting some burden back to vendors. Compliance relies on buyer diligence, leading to widespread underreporting, though states enforce via audits and cross-referencing purchase records. The 2018 v. decision expanded remote seller requirements, increasing collection and reducing some use tax reliance, yet use tax persists for untaxed acquisitions like transfers or international purchases.

Historical Development

Origins and Early Adoption

The use tax originated in the United States during , coinciding with the widespread adoption of state sales taxes amid fiscal pressures from the . States faced declining revenues and sought alternative sources, but interstate commerce allowed residents to evade sales taxes by purchasing goods from out-of-state vendors not liable for in-state collection. To address this avoidance and ensure equivalent taxation on all intrastate consumption, legislatures introduced use taxes on the storage, use, or consumption of tangible bought in non-taxable transactions, typically mirroring rates and bases. Louisiana enacted the nation's first recognized use tax in 1934, applying it to merchandise purchased from out-of-state sellers and requiring self-assessment by consumers to report and remit the tax directly to the state. This measure complemented Louisiana's earlier experiments, though both were temporarily repealed in 1940 before reinstatement in 1948. The self-reporting mechanism reflected early enforcement challenges, as compliance relied on individual honesty without robust auditing capabilities. Early adoption spread quickly to other states integrating sales and use taxes into unified frameworks. California implemented its use tax effective July 1, 1935, alongside its sales tax, to capture revenue from untaxed interstate acquisitions. Washington State codified a combined general sales and use tax in 1935, building on its 1933 excise tax origins. By the end of the decade, as 22 states had adopted sales taxes, use taxes became standard companions, promoting uniformity in taxing consumption irrespective of purchase origin and safeguarding state revenues against cross-border shopping. The first use tax statute in the United States was enacted by Louisiana in 1934, designed to tax the use of property purchased outside the state to complement its sales tax and prevent evasion. California followed in 1935 with its Retail Sales and Use Tax Act, effective July 1, imposing a use tax at the same rate as its sales tax on tangible personal property used within the state if no equivalent tax had been paid elsewhere. Washington State adopted a similar compensating use tax that same year, which became the subject of early constitutional challenges. In Henneford v. Silas Mason Co. (1937), the U.S. Supreme Court upheld the constitutionality of Washington's 2% use tax on equipment purchased out-of-state and used in the state, ruling it nondiscriminatory under the Commerce Clause because it applied equally to in-state and out-of-state purchases and provided credits for sales taxes paid to other jurisdictions. The decision affirmed that use taxes serve as compensatory measures to protect local revenue without burdening interstate commerce, provided they mirror sales tax rates and structures. Subsequent rulings addressed enforcement against out-of-state sellers. In National Bellas Hess, Inc. v. Department of Revenue of (1967), the Court held that states could not compel mail-order sellers lacking (beyond use) to collect and remit use taxes, limiting nexus to tangible connections within the state. This was reaffirmed in Quill Corp. v. (1992), where the Court struck down a use tax collection requirement on an out-of-state vendor with no , emphasizing that such mandates unduly burden interstate commerce despite the complementary nature of use taxes. In Associated Industries of Missouri v. Lohman (1994), the invalidated portions of 's use tax statute where the flat 1.5% additional rate resulted in total use taxes exceeding varying local es in certain jurisdictions, deeming it discriminatory against interstate commerce without uniform compensation. The ruling underscored that use taxes must align precisely with frameworks to avoid violations. The landscape shifted with South Dakota v. Wayfair, Inc. (2018), where the Court overruled and Bellas Hess, permitting states to establish economic nexus for sales and use tax collection based on in-state sales volume or transactions (e.g., $100,000 or 200 transactions annually) rather than physical presence alone. This decision facilitated greater enforcement of both sales and use taxes on remote sellers, reducing reliance on consumer self-reporting for use taxes while respecting state taxing authority.

Operational Mechanics

Self-Assessment and Reporting

Use tax requires by the purchaser, who calculates the amount owed based on the purchase price of taxable or services acquired without payment of equivalent , typically applying the state's rate to that value. This process shifts the burden from sellers—who may lack or collection obligations—to buyers, ensuring taxation on in-state consumption regardless of transaction location. Self-assessment demands accurate record-keeping of receipts, shipping costs, and any partial taxes paid to other jurisdictions, with deductions allowed only for verifiable credits against the destination state's rate. For individuals, reporting occurs primarily through annual returns, where dedicated lines or schedules capture aggregate use tax liability on personal purchases exceeding thresholds, such as out-of-state online or catalog orders. For example, in Colorado, for imported goods, state and local taxes are not billed by the delivery company or collected at import; use tax is self-reported by the buyer on their state tax return. States like integrate this via Form 1, enabling filers to compute and remit owed amounts alongside income taxes, often with simplified worksheets for common items like vehicles or boats. Compliance relies on taxpayer initiative, as no automatic withholding applies, though some states provide online calculators or periods to facilitate voluntary payment. Businesses with permits self-assess and report use on periodic returns—monthly, quarterly, or annually—covering untaxed acquisitions for use, such as from exempt or remote vendors. These returns aggregate sales collections and use remittances, with liability accruing in the period of purchase or withdrawal, requiring segregation of taxable versus exempt transactions. In jurisdictions like New York, filers use unified sales and use forms to declare and pay, offset by credits for taxes paid to suppliers, ensuring alignment with operational cash flows and audit trails. Failure to report accurately triggers interest from the due date, compounded by penalties up to 25% for or higher for intent, underscoring the administrative onus on entities with higher transaction volumes.

Calculation Methods

Use tax liability is determined by multiplying the applicable state or local use tax rate—typically equivalent to the corresponding rate—by the taxable value of the property, which is generally the purchase price excluding any sales or use tax already paid. If the purchase price is unavailable or the property is acquired through means other than purchase, such as gifts or fabrication, the at the time of acquisition serves as the taxable basis. For interstate purchases, taxpayers receive a against use for any or use paid to the seller or another , but only up to the amount of the destination state's use ; any excess paid out-of-state does not yield a refund, while a shortfall requires of the difference. This mechanism ensures equalization without , though administrative variations exist by state, such as limitations on creditable taxes from non-reciprocal s. Individuals commonly calculate use tax annually on returns for qualifying out-of-state purchases exceeding exemption thresholds, such as California's $1,500 annual limit for reporting via worksheet or table methods that aggregate purchases and apply tiered rates. Businesses, by contrast, accrue and report use tax periodically on sales and use tax returns, applying the rate in effect at the location of delivery, storage, or use, often integrating it into broader compliance systems for or capital assets. Special calculations apply to certain assets, like vehicles or aircraft, where or appraised values may adjust the base over time.

Enforcement Mechanisms

State Enforcement Strategies

States primarily enforce use tax through mechanisms, as tracking individual out-of-state purchases is administratively challenging. Most states with taxes complement this by requiring residents to report and remit use tax on their annual individual returns, often providing estimation tools such as lookup tables based on to simplify calculations. For instance, and New York include dedicated lines for use tax on Form 540 and IT-201, respectively, where taxpayers declare amounts owed on untaxed purchases like or online goods. Approximately 27 states mandated or facilitated such reporting as of 2012, a practice that persists in most today, though voluntary compliance remains low at around 1-2% of filers nationally, yielding modest collections such as $33.5 million in New York and $18.6 million in that year. To bolster enforcement, states conduct targeted , particularly of businesses and high-value individual consumers, leveraging third-party data sources like shipping records, transactions, and DMV registrations for taxable items such as automobiles. Aggressive auditing has increased in recent years, with states like and employing external vendors to analyze purchase patterns and issue assessments, often focusing on periods up to three years prior under standard statutes of limitations. Penalties for underreporting include at rates of 0.5-1% per month and fines up to 25-50% of the due, though collection success varies due to resource constraints. Some states offer managed programs, allowing taxpayers to self-review records under agency guidelines to reduce penalties. Additionally, several states impose obligations on remote sellers not required to collect , mandating them to notify customers of use tax liability, furnish annual purchase summaries exceeding thresholds (e.g., $10,000 in sales or 200 transactions), and file reports with the state. As of recent data, states including , , , , , , , , , and maintain such "notice and reporting" regimes, with penalties for seller non-compliance ranging from $100 per violation to 1-5% of unreported sales; however, several like Georgia and repealed these post-2019 due to streamlined collection under economic nexus rules from v. . These measures aim to indirectly prompt consumer remittance but have yielded limited revenue, underscoring persistent evasion rates estimated below 10% for self-reported use tax. Public awareness campaigns and voluntary disclosure programs further support , with initiatives like Maine's targeted mailings to non-reporters boosting participation to 10.2% temporarily. Despite these efforts, overall compliance hovers at low levels, attributed to taxpayer unawareness and the perceived low risk of detection for small purchases.

Compliance Challenges and Evasion

Compliance with use tax obligations presents significant difficulties primarily due to its reliance on voluntary by taxpayers, who must track, calculate, and remit taxes on taxable purchases where no was collected at the point of sale. This system contrasts with , which are typically withheld by vendors, leading to inherently lower efficacy and taxpayer adherence. Estimates indicate that individual compliance rates for use tax in the United States range from 0% to 5%, reflecting widespread non-reporting of out-of-state or untaxed purchases such as , , and . Businesses exhibit somewhat higher compliance, often through processes during audits or reviews, yet underreporting persists due to challenges in identifying and valuing taxable acquisitions across complex supply chains. Key challenges include low taxpayer awareness and the administrative burden of record-keeping, as individuals rarely receive invoices prompting use tax payment, and calculating rates—often mirroring varying state and local structures—requires cross-referencing purchase locations with destination-based liabilities. The perception of minimal audit risk further exacerbates non-compliance, with state revenue departments lacking resources for comprehensive individual-level verification, relying instead on return integrations or sporadic data matches from shipping records. For instance, in states like Washington, use tax registers among the lowest compliance rates among major taxes due to its "low visibility" to taxpayers, who view it as an abstract obligation rather than an immediate deduction from funds. Post-2018 South Dakota v. Wayfair ruling, while marketplace facilitators now collect es on many remote sales, gaps remain for direct business-to-consumer shipments or imports where sellers do not register, shifting the burden back to self-reporting and sustaining evasion opportunities. Evasion tactics commonly involve deliberate underreporting or omission of taxable uses, particularly for high-value items like boats, , or materials, where taxpayers exploit jurisdictional ambiguities or classify purchases as exempt without . Empirical studies attribute this to factors such as weak social norms around , low perceived detection probabilities (often below 1% for non-business filers), and sanctions that, while including penalties up to 25-30% plus , are infrequently applied absent audits. Businesses may evade by failing to segregate taxable versus exempt purchases or by routing acquisitions through tax-friendly jurisdictions, contributing to estimated annual revenue losses in the billions across states. Efforts to curb evasion, such as simplified reporting tools or pre-filled estimates on forms, have shown modest gains in experimental settings, increasing compliance by reducing effort and bolstering deterrence signals, but systemic understaffing at agencies limits scalability. Overall, these dynamics result in use representing a substantial component of state tax gaps, underscoring the causal link between feasibility and voluntary adherence.

Exemptions and Exceptions

Standard Exemptions

Use tax exemptions in the United States generally parallel those for , applying to the same categories of tangible to maintain consistency in state and prevent undue burden on essential or certain transactions. These exemptions are codified in state statutes and aim to exempt necessities, facilitate business inputs, or honor immunities for specific entities, with the rationale rooted in economic relief for low-income households, support for resale and production activities, or . For instance, groceries and unprepared food items are exempt in 46 states (with reduced rates in some others), reflecting a to mitigate regressivity on basic sustenance, while prescription drugs are universally exempt across all states imposing sales or use taxes. Purchaser-based exemptions form a core standard category, extending to federal, state, and entities due to constitutional immunities under the , which prohibits states from taxing federal operations. Nonprofit organizations, particularly those qualifying under Section 501(c)(3) of the , receive exemptions in most states for purchases used in exempt activities, though documentation like resale certificates or exemption letters is required to claim them. Resale exemptions are standard for acquired for subsequent sale, allowing businesses to defer tax until the final consumer transaction, provided the purchaser holds a valid resale permit issued by the state department of revenue. Purpose-driven exemptions target inputs in production or , such as machinery, raw materials, or fuel used directly in or farming, which are exempt in approximately 40 states to avoid cascading taxes that distort supply chains. Exports of are exempt nationwide, aligning with norms under the Export Clause of the U.S. Constitution, ensuring no state use tax applies to goods shipped out-of-state or abroad for consumption elsewhere. Casual or occasional sales by non-regular vendors, such as yard sales, are exempt up to specified thresholds in most states (e.g., $1,000 annually in ), distinguishing them from commercial retail to limit administrative burdens. These standard exemptions require substantiation through records or certificates, with failure to comply potentially triggering audits and plus penalties.

Special Permits and Proof Requirements

Businesses seeking exemption from use tax on purchases intended for resale must typically hold a valid permit, also known as a seller's permit or resale certificate, issued by the state department of revenue where they are registered to collect . This permit serves as authorization to acquire tangible personal property without paying use tax, on the condition that the goods are resold in taxable transactions within the state, thereby shifting the tax burden to the end consumer. To invoke this exemption with an out-of-state , the purchaser issues a resale certificate documenting the intent to resell, which the may require to forgo collecting tax at the point of sale. The Multistate Tax Commission (MTC) provides a Uniform Sales and Use Tax Resale Certificate, accepted by 36 states as of 2023, allowing multistate businesses to use a single form for proof across jurisdictions rather than state-specific variants. States mandate that resale certificates include details such as the purchaser's permit number, description of goods, and expiration date—often valid for one year or until revoked—and require retention for purposes, generally 3 to 5 years depending on the jurisdiction. Failure to maintain valid documentation can result in the exemption being disallowed, with the purchaser liable for back use taxes plus penalties. For non-resale exemptions, such as those for qualified nonprofit organizations, governmental entities, or specific uses like agricultural production, purchasers must furnish an exemption certificate demonstrating eligibility. These certificates often require supporting evidence, including IRS determination letters for 501(c)(3) status or official charters for public bodies, submitted to the or retained for self-assessed use tax filings. Some states issue specialized direct pay permits to high-volume users, such as manufacturers, permitting self-assessment and direct of use tax to the state, bypassing vendor collection; eligibility typically demands detailed application processes and ongoing compliance reporting. Proof of equivalent tax payment in another can offset use liability, requiring submission of invoices or receipts evidencing remitted at a comparable rate, with credits limited to the differential if the origin exceeds the destination rate. Taxpayers must verify exemption validity at the time of purchase and update documentation periodically, as expired or fraudulent certificates expose them to assessments during state audits, which prioritize record substantiation over self-reported claims.

State Variations in the United States

Forty-five states, plus the District of Columbia, impose use taxes to complement their es, applying the tax to tangible purchased from out-of-state sellers who do not collect the state's or to items used within the state after tax-free acquisition. These taxes generally match the applicable rate, ensuring parity between in-state and interstate consumption, though the five states without statewide es—, , , , and —do not levy statewide use taxes, with permitting certain local options. State-level use tax rates, mirroring rates, range from 2.9 percent in to 7.25 percent in as of mid-2025, with many states authorizing local additions that can push combined rates above 9 percent or even 10 percent in high-tax jurisdictions like parts of or . For instance, 's base rate applies uniformly, but local districts add up to 3.25 percent, while 's lower state rate sees localities contributing variably up to 8.3 percent combined in some areas. Rates are subject to periodic adjustments; as of July 1, 2025, states like expanded taxation to certain services under use tax rules, and local changes occurred in jurisdictions such as and boroughs. Reporting obligations differ significantly by state, with most requiring individuals to self-assess use tax on annual returns or dedicated forms for purchases exceeding thresholds, such as Massachusetts's mandate for 6.25 percent on untaxed out-of-state used in the state, crediting any lower tax paid elsewhere. States like demand reporting of all due use tax without a minimum threshold for individuals, often via Form 540, while others, such as , tie it to specific events like vehicle titling or provide simplified schedules for common items like boats and . Non-compliance can trigger penalties ranging from 5 percent per month in some states to flat fines, though voluntary disclosure programs exist in jurisdictions like New York to encourage reporting. Enforcement strategies vary in aggressiveness and methods, with states like California and New York utilizing data analytics from shipping manifests, DMV registrations, and third-party purchase records to pursue audits and assessments, yielding millions in recovered revenue annually. In contrast, enforcement in lower-rate states like Colorado relies more on periodic amnesties and educational campaigns rather than routine individual pursuits, contributing to historically low voluntary compliance rates below 10 percent nationwide for consumer use tax prior to enhanced seller collection post-2018 Wayfair ruling. Some states, including those with notice-and-report provisions for remote sellers, shift partial burden to vendors by requiring them to notify buyers of use tax liability or remit seller's use tax on non-collected amounts, as in variations seen in over 20 states by 2025. These differences reflect fiscal priorities, with higher-tax states investing more in compliance infrastructure to capture revenue from e-commerce and cross-border purchases estimated at tens of billions annually.

Interstate Commerce Considerations

The of the U.S. restricts states from imposing taxes that discriminate against interstate commerce or impose undue burdens on it, requiring any such tax to be applied to activity with a substantial connection to the taxing state rather than purely extraterritorial elements. State use taxes, which target the storage, use, or other consumption of tangible within the state after an out-of-state purchase, are evaluated under this framework to ensure they tax local activity without interfering with the free flow of interstate trade. The U.S. has consistently upheld use taxes as valid when structured as compensatory measures mirroring in-state sales taxes, thereby leveling the competitive field without favoring intrastate transactions. In Henneford v. Silas Mason Co. (1937), the Court affirmed the constitutionality of Washington's 2% use tax on materials purchased out-of-state and used in-state for construction, ruling that it taxed the privilege of use within Washington rather than the prior interstate sale, thus avoiding a direct burden on commerce. Similarly, McLeod v. J. E. Dilworth Co. (1944) clarified that while a state cannot impose its on an interstate transaction where title passes outside its borders, it may validly apply a use tax to the subsequent consumption by its residents, preserving the distinction between taxing sales (interstate) and use (intrastate). These rulings establish that use taxes do not violate the when they focus on in-state effects, provided they do not attempt to regulate or tax the interstate movement itself. The validity of use taxes is further assessed through the four-prong test articulated in Complete Auto Transit, Inc. v. Brady (), which sustains a state on interstate if it (1) applies to an activity with substantial to the taxing state, (2) is fairly to reflect in-state activity, (3) does not discriminate against interstate , and (4) is fairly related to the services provided by the state. For resident purchasers, the prong is satisfied by the property's physical presence and use within the state, while limits the to the value consumed locally; non-discrimination is achieved by aligning use rates with rates, avoiding preferential treatment for in-state purchases. The relation to state services prong holds because use taxes fund public goods benefiting consumers, such as supporting consumption. However, this test constrains states from extending collection obligations to remote sellers without their own substantial to the taxing , as extraterritorial would exceed state authority and risk multiple or inconsistent taxation across borders. Interstate considerations also encompass risks of cumulative taxation, where goods used across multiple states could face overlapping use tax claims, though mitigation occurs through state practices allowing credits for taxes paid to other jurisdictions on the same purchase. Such credits, common in state tax codes, ensure by reducing the effective rate to the higher of the origin or destination state's levy, aligning with the fair apportionment requirement. Nonetheless, without federal uniformity, variations in definitions and credit mechanisms can still impose compliance costs on interstate transactions, prompting scrutiny under the where administrative complexity demonstrably hinders commerce.

Economic and Policy Analysis

Revenue Generation and Fairness Claims

Use taxes aim to generate equivalent to state taxes on tangible purchased out-of-state and used within the taxing , capturing fiscal contributions from consumption that evades point-of-sale collection. In 2020, state and local governments collectively reported general and use tax exceeding $500 billion, though the use tax component—distinct from vendor-collected taxes—relies heavily on and yields far less due to underreporting. entities contribute the majority of reported use tax through mandatory filings and audits, while compliance remains critically low, with average reporting rates across sampled states estimated at approximately 1.9 percent. Nationally, uncollected use taxes from remote and interstate purchases represented tens of billions in lost prior to expanded remote seller obligations, with 2015 estimates indicating nearly $26 billion in uncollected amounts from non-collecting remote alone. Post-2018 decision, economic rules have shifted more collection responsibility to remote vendors via , modestly reducing the use tax gap but leaving self-reported liabilities—particularly for direct imports or non-compliant sellers—largely unrealized. Advocates maintain that use taxes promote fairness by enforcing horizontal equity, ensuring equivalent taxation on similar consumption irrespective of purchase origin and thereby leveling the competitive field for in-state retailers burdened by collection obligations. This mechanism purportedly prevents revenue erosion from cross-border shopping, where untaxed goods benefit from state-provided infrastructure, education, and public services without reciprocal contribution, sustaining fiscal capacity for essential expenditures. Such claims align with principles of causal , positing that consumption within a imposes measurable costs on its structures, warranting uniform to avoid subsidizing evasion through compliant payers' burdens. Skeptics challenge these fairness assertions, arguing that pervasive non-compliance—often below 2 percent for individuals—renders use taxes inequitable in execution, as local sellers face mandatory collection while out-of-state alternatives effectively escape taxation, distorting markets and eroding the intended parity. The voluntary nature imposes asymmetric administrative costs on aware consumers and businesses, fostering perceptions of arbitrariness and selective enforcement, while empirical evasion rates indicate systemic failure to achieve stated equity goals. Furthermore, as a consumption levy mirroring sales taxes, use taxes exhibit regressivity, with lower-income households bearing higher effective rates relative to income spent on taxable goods, complicating vertical fairness despite horizontal rationales. Pre-Wayfair data underscored this disparity, with uncollected sums disproportionately impacting state budgets reliant on consumption taxes, yet post-Wayfair vendor collections have not fully mitigated consumer-side gaps, sustaining debates over the policy's real-world equity.

Criticisms and Economic Distortions

Critics of use tax argue that its self-assessment requirement results in chronically low voluntary compliance rates, undermining its purpose of ensuring tax neutrality between in-state and out-of-state purchases. In Washington state, for instance, use tax noncompliance amounted to approximately $64 million annually, representing nearly 20 percent of total use tax liability, as identified in a state Department of Revenue compliance study covering sales and use tax periods from 2013 to 2015. Broader estimates suggest even higher evasion, with some analyses placing state use tax noncompliance as high as 70 percent, drawing parallels to shadow economy behaviors where self-reported taxes are minimal without enforcement. This evasion creates inequities, as compliant in-state retailers bear the full tax burden while out-of-state sellers effectively gain a competitive edge until remote collection mandates like the 2018 Wayfair decision intervene, though gaps persist for non-digital or unregistered transactions. Economically, use tax distorts and behavior by incentivizing strategies, such as structuring purchases to evade reporting or favoring untaxed channels, which fragments markets and reduces efficiency. Businesses face unpredictable liability shifts post-purchase based on usage location or type, complicating and , as highlighted in analyses of consumer use tax dynamics where invoiced exemptions can reverse upon audits or reallocations. For individuals, the cognitive and record-keeping demands of tracking and remitting use tax on myriad small transactions—often from online or cross-border buys—lead to widespread non-remittance, effectively subsidizing non-compliance at the expense of state revenues and distorting local retail competition. These distortions compound administrative costs for states, which must ramp up audits to capture revenue, yet yield given the decentralized nature of consumption; Washington's study, for example, underscored use tax as the highest noncompliance area among consumption taxes, straining resources without proportional fiscal gains. Further critiques focus on the regressive incidence and biases of use tax, which disproportionately burdens lower-income households less likely to engage in high-value interstate purchases but more sensitive to price signals encouraging evasion. on use tax reporting behaviors indicates that voluntary compliance explains a larger variance in adherence than threats or penalties alone, pointing to normative and informational failures rather than purely deterrent shortcomings. In practice, this fosters a "tax gap" where uncollected use taxes erode fiscal capacity, potentially necessitating higher rates elsewhere to compensate, thereby amplifying deadweight losses—estimated in general models as higher than idealized neutral systems due to imperfect . Proponents of , including analyses post-Wayfair, question the net value of standalone use tax reliance, arguing it perpetuates complexity without achieving the intended leveling of interstate commerce.

Recent Developments and Impacts

Effects of the Wayfair Decision

The U.S. Supreme Court's 5-4 decision in South Dakota v. Wayfair, Inc. on June 21, 2018, overturned the physical-presence rule from Quill Corp. v. (1992), permitting states to require out-of-state sellers to collect and remit es based on economic thresholds, such as exceeding $100,000 in annual sales or 200 transactions into the state. This shift directly bolstered use tax enforcement by proxy, as remote sellers' collection of on interstate transactions reduced consumer reliance on self-reported use taxes, which historically exhibited low compliance rates due to administrative burdens on individuals. States experienced measurable revenue gains from remote sellers post-Wayfair. By June 2022, alone had collected $212.8 million in and use es from such vendors since the ruling. A 2022 Government Accountability Office survey of state revenue agencies confirmed attributions of revenue increases to expanded remote collections, though quantifying the exact Wayfair-specific increment proved challenging amid broader economic factors like growth. By 2024, 45 states plus the District of Columbia had enacted economic laws, standardizing thresholds around $100,000 in or 200 transactions to capture untaxed online activity previously evading use obligations. Compliance burdens escalated for businesses, particularly smaller entities lacking resources for multi-state tax systems. Economic prompted registration in numerous jurisdictions with divergent rates, filing frequencies, and exemptions, amplifying software, , and audit costs. One small seller reported expending over $455,000 in compliance expenses to remit $173,000 in taxes since 2018, highlighting disproportionate impacts on low-volume remote vendors. Similarly, U.S. Government Accountability Office data cited instances of businesses facing $1,500 monthly compliance outlays to collect under $500 in tax, potentially distorting market competition by favoring larger firms with in tax automation. audit rates for affected businesses quadrupled from under 1% in 2021 to higher levels by 2023, as states pursued back collections. Proponents, including state governments, contended the ruling promoted fairness by equalizing burdens between local brick-and-mortar retailers and remote sellers, thereby curbing use avoidance that disadvantaged in-state . Critics, drawing from empirical compliance cost data, argued it imposed regressive administrative loads on small businesses, potentially stifling interstate innovation without corresponding consumer price reductions, as sellers often passed costs forward. Overall, while enhancing state fiscal capacity, the decision entrenched a of obligations that, absent federal simplification, sustained elevated use evasion risks for non-collected transactions. States have intensified use tax enforcement through expanded programs, driven by revenue shortfalls and broader economic standards established post-South Dakota v. Wayfair (2018). In 2024, activity surged, with states like , New York, , , , Georgia, and accounting for a majority of out-of-state use tax examinations, often targeting businesses with significant remote purchases or interstate acquisitions not subject to point-of-sale collection. This trend reflects states' efforts to capture unpaid use taxes on tangible , such as equipment bought out-of-state or imported goods, where compliance remains low—estimated at under 10% for many taxpayers due to tracking complexities. Businesses are increasingly adopting automated compliance tools to manage use liabilities amid these s, incorporating AI-driven software for real-time transaction monitoring and exemption certificate validation across jurisdictions. Reports indicate that by 2025, over 70% of large enterprises plan to integrate such technologies to mitigate risks, particularly for multi-state operations involving drop shipments or , which often trigger use obligations. However, smaller entities face persistent challenges, as manual processes for use on non-taxed purchases—such as business machinery or software—lead to frequent underreporting, exacerbated by varying state definitions of taxable "use." Emerging trends include heightened scrutiny of use tax on digital downloads and services, with states like imposing new levies effective July 1, 2025, on IT-related items, prompting businesses to reassess historical accruals. data from mid-2024 shows audit assessments rising by up to 20% in high-activity states, correlating with voluntary disclosure programs that have processed thousands of amended returns to avoid penalties, which can exceed 25% plus interest for willful non-compliance. Despite these measures, compliance gaps persist due to interstate variations, underscoring the need for centralized tracking systems to align with states' push for uniformity in reporting thresholds.

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