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States’ "Use Taxes" May Provide Surprise Ending To Foreign Travel, CCH Warns

You can think of the use tax as the twin of your state’s sales tax because it’s imposed at the same rate, but only on out-of-state purchases. States impose sales taxes when a sale takes place within their borders. But if you buy something out-of-state, bring it home and use it, you are subject to your state’s use tax. You generally get credit for the sales tax you paid to another state, but taxes paid to a foreign country don’t count for the purpose of lessening your use tax obligation.

As a practical matter, your state’s department of revenue is unlikely to know about the $20 worth of seeds you bought – without paying tax – from a mail-order company located in another state. But with e-commerce growing every day at the expense of state treasuries, states are looking more and more to their use tax laws as a way of making up for the shortfall, according to John Logan, JD, senior state tax analyst for CCH.

"States currently have mechanisms for collecting use taxes from businesses, and they have a legal right to collect use taxes on individual purchasers, if they can document the out-of-state transactions," Logan said.

For example, since cars, boats and travel trailers have to be licensed, their owners are likely to receive a tax bill that they must pay before they can register their property.

Customs Declaration Leads to Tax Bill

Another way that revenue agencies can learn of out-of-state purchases is from the U.S. Customs Service. The Customs Service routinely passes on to state agencies the information travelers disclose on their customs declarations. Some returning travelers may notice posters at airports reminding them of their use tax obligations, and the income tax forms for some states request taxpayers to report their use tax liability. But for many weary travelers, the first inkling that they owe use tax comes in a notice from their state revenue department demanding payment.

That’s how Warren J. Grossman, of New York City, found out about his state’s use tax after he returned from a trip abroad with over $1,500 worth of purchases – mainly gifts intended for family members living in Connecticut and Maine – in the fall of 1997. In May of the following year, Grossman received a bill from the New York Department of Revenue. Grossman contested the assessment, pointing out that he never "used" the merchandise in New York at all – he sent the items, unused, to their intended recipients within a week of arriving back home.

But a New York Administrative Law Judge ruled that simply storing the items in his home and then sending them on to out-of-state family members was enough to make Grossman liable for use tax.

Logan noted that many states are becoming more aggressive about collecting use tax, and travelers will simply have to make allowances for that in judging the true cost of foreign purchases.

"You shouldn’t try to avoid use tax by falsifying your customs declaration because that can expose you to serious penalties," Logan added. "Just factor in your state’s use tax when you go looking for bargains overseas."

About CCH INCORPORATED

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com. The CCH Federal and State Tax site can be accessed at http://tax.cchgroup.com.

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STATE SALES AND USE TAXES

1 Merchants and Manufacturers License Tax
2 Use Tax on Personal Property Leases

Source: CCH INCORPORATED, 2000