To understand the concept of a use tax, one must first be comfortable with the concepts behind a sales tax. A sales tax is a tax on retail sales of tangible personal property and specific services identified by state statute. While the definition appears simple and straight forward, there are terms within it that provide for much controversy.
What constitutes a retail sale?
A sale at retail is a sale to the ultimate end user of a product (ie: items sold for resale are not a sale to an end user).
What is tangible personal property?
Tangible personal property is something that you can touch, feel, see, takes up physical space and is not considered to be real property.
What is real property?
Real property is generally any tangible property that is permanently affixed to land.
Therefore, the purchase of a computer for your personal use will be subject to sales tax, while the purchase of lumber for the construction of your personal residence is not.
Use tax is sometimes referred to as the “sister tax” to sales tax. It is designed to tax purchases that were subject to sales tax, but no sales tax was paid. How does that happen? Retailers are not required to collect sales tax on purchases made by consumers in a state where the retailer does not have a physical presence. The legal term for this is “nexus” (The nexus issue is a result of constitutional restrictions on states against them taxing interstate commerce. Nexus issues are presently being attacked by many states in an effort to increase their tax revenue.)
A state may not levy a tax on transactions that occurred in another state. Therefore, they charge a “use tax” on otherwise taxable items that will be used, stored, or consumed in their state. The tax is levied on sales that were not subject to sales tax in the state where the asset was purchased (because of nexus issues). If the purchase was taxable in the purchaser’s state of residency, but no tax was collected, a use tax is due to the resident’s state. This often happens when items are purchased by catalog or over the internet from companies located in another state.
The use tax is the same rate as the resident’s sales tax. Ohio residents are required to either report their use tax liability on line 19 of their individual income tax return form IT1040, or to certify that they have no use tax liability.
Written by: Gary D Levin, CPA