What Are Use Taxes and Why Should I Care?

April 17th, 2006

ShopperFor us netizens who reside in the United States, “use taxes” are starting to become an important topic. Essentially, a use tax is a sales tax on purchases for which you didn’t have to pay sales tax. I know that sounds confusing, so let me give an example:

I live in Denver, Colorado but travel to Oregon (which has no state sales tax) and purchase a car. When I return home, I am required to pay a use tax of 7.6%:

  • Colorado state: 2.9%
  • Denver city: 3.5%
  • Regional Transportation District: 1.0%
  • Scientific and Cultural Facilities District: 0.1%
  • Metropolitan Football Stadium District: 0.1%

This happens to be exactly the same amount I’d pay in sales tax had I bought the car in Denver. If the car were to be delivered to my location in Denver, then the seller should collect the use tax. Otherwise, it is my responsibility to pay the taxes to the appropriate authorities.

So why is this important? It’s all about the internet. When I purchase a “tax-free” product online and don’t pay the appropriate use tax, I’m breaking the law. As internet sales have become more popular, the states have begun to realize they’re losing use-tax revenues—so they’re cracking down. Some states, Colorado not among them, have put a line on the state tax form for honest citizens to declare any use taxes they owe. As the linked article states:

“If you’ve written zero or left [the use tax entry] blank, during the audit we’re going to make you produce your financial records, bank statements, credit card statements,‘ said Michael Bucci, a spokesman for the New York Department of Taxation and Finance.

Over the past few years I’ve heard various mutterings about the collection of use taxes for internet purchases, and I expect it to become more of an issue as time progresses.


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