As a general rule, a state's taxing power reaches only as far as its borders.
What this means for sales tax purposes is that a state cannot impose its sales
tax on retail sales that are consummated
in other states. This restriction created the concern that purchasers could
avoid paying a state's sales tax by making their purchases outside the state. To
close this perceived loophole, each state that has a sales tax also has a
complementary "use" tax. The use tax applies to the "use,
storage, or other consumption" within the state of tangible personal
property, the purchase of which would have been subject to the sales tax had the
transaction occurred within the state.
Let's assume you operate a commercial photography studio in
California. You regularly go to Oregon to purchase all the
cameras you use in your business. California can't impose its
sales tax on your camera purchases, because those purchases were
made outside the state. However, California can subject the
cameras to its use tax once you bring them into the state.
The following are the key elements of use taxes:
- Complementary tax - a state's use tax is designed to be no broader
in scope than its sales tax. For the most part, exemptions
are the same for both of the taxes. In our example, if you could have
purchased the cameras in California free of sales tax, then your use of the
Oregon-purchased cameras would have been exempt from use tax. Similarly, the
basis for computing the use tax is generally the "selling
price" of the property, just as it is for purposes of computing the
sales tax. Finally, a state's use tax rates are identical to its sales tax
- Self-assessment - perhaps the biggest difference between a state's
sales tax and its use tax is the manner in which the taxes are paid. For the
most part, sales taxes must be paid or
collected by the seller. In contrast, the responsibility for reporting
and paying use taxes generally falls on the purchaser. This is commonly the
case because the triggering event for the tax - the taxable "use"
of the property in the state - occurs after the sale is completed and
because the state may not have the power to force the out-of-state
seller to collect its use tax.
- Credits - every state other than Nevada allows purchasers a use tax
credit for sales taxes paid to another state with respect to the same
property. In our example, you would be able to offset your California use
tax liability on the cameras by any Oregon sales tax you paid on the
- Other taxable uses - in some situations, a use tax liability may
arise with respect to property that was not purchased in another state.
Perhaps the two most common of these situations arises when you (1) purchase
an item free from sales tax by claiming an exemption, but then use the item
in a manner that is inconsistent with that exemption or (2) you withdraw
from your inventory an item that you produced for sale.