Thursday, August 13, 2009

The Four Loopholes (Loophole Number 4)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

The state can't "reach" the seller - they have no jurisdiction over the seller

In other words, the state can't get the seller to collect the sales tax from the buyer, so they invented use tax to get it from the buyer instead.

The most common example of this is our good friend or, for that matter, any other mail order or online retailer.

If you're in most states, when you buy from, they don't have to charge you tax. The short answer is that they aren't in your state. There are no stores, warehouses, offices, facilities, delivery trucks, representatives, etc. In order for a state to impose their laws on a potential taxpayer, that taxpayer must have nexus in the state - a physical presence. doesn't have a physical presence or nexus in most states. According to this page on's web site, they do have nexus in these states (WA, ND, KS, and KY) and charge tax. They also charge tax in NY, but that's a weird situation. Someday, I'll write an article about it, but don't hold your breath.

So doesn't have to obey most state laws and doesn't have to charge their buyers tax. So what is, say, Alabama supposed to do? They want that tax revenue. Mail order and online sales are a big part of the economy, and they can't simply write off that segment.

Alabama and all of the other states therefore close the loophole by imposing a use tax on the buyer. That use tax doesn't get paid very often, particularly by individuals. But for businesses, this is the primary objective of the audit that will hit you at some point. They will want to see if you've been paying your use taxes. Hopefully, regular readers of this blog are.

Another related way this loophole works are sales by the Federal government. States generally can't make the Feds collect sales tax on their sales. But many states will say that, if the buyer gets something from the Federal government, and it wasn't taxed, the buyer owes use tax. This is about the only other example of a situation where the state can't "reach" the seller.

The fourth loophole for why states have a use tax is to plug situations where they can't make the seller collect the tax.

Sales Tax Guy

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Picture note: I wanted to illustrated interstate sales and I don't have any pictures of semi-trucks. But this is one of my most popular train pictures. Enjoy it on Flickr here if you want to see it larger.

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