Tuesday, March 09, 2010

Sales tax and use tax are complementary

Use tax, as mentioned elsewhere, is a loophole plugger. It was invented for the situations where sales tax couldn't be imposed.

In more high-highfalutin language, we say that use tax is a complementary or compensating tax. In addition to plugging those loopholes, it also means that the rules are generally the same. In every state, the state sales tax rate and the use tax rate are the same. In every state there are very few significant variations between the taxing policies for sales tax and use tax. That's because use tax wasn't intended to do anything other than collect the taxes that the state couldn't collect through sales tax.

But there are two major variations:

1. In some states, the total sales tax rate and use tax rate may vary. That's because, in those states, the local component of the rate is only sales tax, not use tax. For example, in my town in Illinois, the total rate is 8%, which is made up of 6.25% for the state and 1.75% for the city. But that 1.75% is only sales tax, not use tax. So when I order something from Amazon.com, who won't be charging me tax, and fill out the Illinois use tax return, I only have to pay 6.25% use tax. The city won't get any of that money.

Illinois does it that way. But even in Illinois, there is weirdness. For most places and states, use tax does apply to the local component. But there are enough twists and turns so that you need to be aware of this complication. Now that you know, keep an eye out for it when you're inspecting local tax rules and rates.

2. The sales tax laws regarding occasional / casual sales vary when it comes to buying a car or other registerable items (ATV, boat, plane, etc. ) Even though the occasional sale of a car won't be taxable as far as the seller collecting sales tax, the buyer will have to pay use tax when they register it. That's a difference between the sales tax rules and the use tax rules.

The Sales Tax Guy

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