This Tax Season, Don’t Forget Your Use Tax!

jodyheadAs April 15th quickly approaches, Americans are gathering their receipts and paperwork; breaking out the calculator and doing their taxes. For some that means going to visit their accountant, for others downloading the latest tax software or for the traditionalists – filling out their tax forms with pencil and paper.

However you choose to take care of your tax task, there is one item on most state income tax forms that you shouldn’t ignore. In my home state of Illinois it’s Step 8, Line 23 on the personal income tax form: “use tax on internet, mail order, or other out-of-state purchases.” This is where taxpayers need to calculate the amount they owe in state and local sales taxes on the online purchases they made in the previous year.

Many shoppers think they’re getting a better deal when they shop online. Most online retailers are not required to calculate or remit sales and use taxes. This means that their prices are anywhere from 4 – 10% lower than brick and mortar retailers selling the same goods. But the reality is that just because online retailers aren’t required to collect this tax doesn’t mean that consumers aren’t required to pay it. Failure to do so can lead to audits, fines and penalties. That’s why it’s so important to calculate how much you owe for online purchases and not leave that line blank.

With so many states strapped for cash, they’re looking for any opportunity to collect the revenue necessary to operate. Illinois even addresses it on their Frequently Asked Questions page and succinctly highlights why it is so important to pay this tax:

“If you use goods in Illinois that were purchased tax free or at lower rates outside Illinois, you owe use tax to the department. If you do not pay, it is unfair to Illinois retailers, consumers, and taxpayers in the following ways:

  • Illinois retailers, who must charge sales tax, are put at a competitive disadvantage as compared to out-of-state retailers, who charge no sales tax, or charge tax at rates less than Illinois rates.
  • Illinois must make up these lost revenues or curtail state services provided to consumers and taxpayers.”

 

If you go to an accountant, use an electronic tax filing system, or carefully read the tax form instructions there are algorithms that can roughly estimate your state sales tax liability based on your income and online shopping habits. However, if you want to accurately calculate your use tax, there are the steps you can follow. I’m using Chicago, Illinois as my example, but tax rates and laws in your city, county and state will be different.

1. Determine how much you spent online and out of state.

  • For this exercise let’s say that you bought online a $50 pair of running shoes, a $150 digital camera and spent $10 on specialty coffee beans
  • Illinois state law requires you to additionally account for any purchases you bought out of state. For example, if you bought a necklace while on vacation in Atlanta, you paid the 4 percent Georgia sales tax on jewelry. However, by bringing the items back home to Illinois, you owe the 2.25 percent difference in use tax as well.
  • Gather your receipts and tally up your purchases, pay attention because there are some online retailers that do collect sales tax – you shouldn’t include these purchases in your calculations since you’ve already paid

 

2. Determine your state sales tax

  • In Illinois this is 6.25 percent
  • If you live in another state, you can use software like Avalara or TaxCloud to look up your local use tax rates

 

3. Determine any specialty taxes

  • In Illinois, there is an additional 1 percent tax on qualified food, non-prescription drugs and medical appliances that would apply to the specialty coffee beans

 

4. Calculate what you owe

  • For the general purchases, you owe $13.13
  • For the specialty coffee beans, you owe $1.23
  • You would fill in $14.36 on your tax form for your online purchases

 

It doesn’t have to be this hard. If Congress would pass eFairness legislation online retailers would simply collect and remit sales and use taxes for you at the time of purchase. Brick and mortar retailers do this on every purchase already and there are several companies that offer online retailers the ability to fully automate tax collection and remittance, so we know it isn’t too complicated to do. Additionally, this streamlined process would ensure that cities and states governments get the funds they need to operate.

Jody L. Padar, CPA, MST, is the CEO and Principal at New Vision CPA Group and author of The Radical CPA at theradicalcpa.com.


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