Teresa Barnwell had never heard of “use taxes” until she got a call from a North Carolina-based furniture store where she’d purchased couches and patio furniture several years ago.
The retailer sheepishly told her that she would be getting a bill in the mail for $487.31 from California’s Board of Equalization. The reason: The retailer didn’t charge Barnwell sales tax on nearly $6,300 of purchases in 2002 and 2004 because she wasn’t a North Carolina resident.
At the time, Barnwell thought that was a bargain. But it’s turned around to bite her.
Because Barnwell bought those items to use at her home in Costa Mesa, she owed use tax, a levy that mirrors sales tax in every way except in how it’s collected. Sales tax is collected by retailers. In the case of use tax, the taxpayer is expected to know the tax is owed and to send in the proper amount.
Barnwell is not alone. Industry experts say that state governments – California’s in particular – have become more aggressive about collecting use taxes in the last few years. With retail sales increasingly occurring online, a tremendous amount of government revenue is at stake. California officials estimate that about $1 billion in use tax goes unpaid each year, possibly because taxpayers don’t know that they owe the money.
California’s Board of Equalization, which collects the sales and use taxes, sent out letters to tax preparers last month, urging them to grill their clients about their out-of-state purchases and warn them that anything that didn’t get hit with sales tax at the time of purchase was subject to use tax and was due by April’s filing deadline.
“Nobody tells you when you don’t pay the sales tax, you’re going to have to go home and pay a use tax,” said Barnwell. “You just assume it’s a loophole in the system and that you got a good deal.”
In case use tax taxes take you by surprise, here are the basics of what they are and how they work.
QWhat is a use tax?
AIt’s a tax on goods that you purchased elsewhere for use in your home state. It is identical to sales tax, except in how it’s collected. Sales taxes are collected by retailers at the time of purchase, while use taxes are paid by the consumer directly to state tax authorities.
Q Are use taxes new?
A No. Use taxes date to 1935 but weren’t heavily enforced because people made most of their purchases at in-state retail stores that would collect sales tax. But with the Internet picking up an increasingly large number of sales, state governments have ramped up collection of their use taxes to recover revenue that would otherwise be lost.
Q Does every state have a use tax?
A No. But most states that have sales taxes have use taxes too.
Q Is everything I’ve ever purchased from an out-of-state retailer subject to use tax?
A It’s levied on most everything you buy except for prescription drugs and “consumables” such as food and drinks. Some out-of-state retailers collect sales taxes so you don’t have to pay use tax. If they don’t, however, you do.
Q What if I’ve purchased things out of state and didn’t pay sales taxes? Am I going to get a bill like Barnwell did?
A You might. It depends on how long ago you purchased them, and, frankly, whether the retailer was prominent enough to get audited for similar sales. Even ramped-up enforcement efforts won’t catch everyone.
Tax authorities don’t appear to be going after small sales, either. But if you bought a car, boat or furniture, you’ve got a fair chance of getting caught.
Q Is there a statute of limitations on use taxes? I know, for example, that the IRS can’t go after you for unpaid income tax after three years.
A There is a statute of limitations. In California it’s usually eight years, but in some instances it can be 10. So a consumer could be hit with use tax on items that were bought, worn out and given away long ago.
Q I’ve moved to California from another state. Do I have to pay use tax on stuff that was purchased in my former home state when I lived there?
A Generally not, but if a purchase was made within six months of the move, you might, Board of Equalization spokeswoman Anita Gore said. When in doubt, consult a tax professional.
Q How do I pay use tax?
A There’s a line on California income tax forms that asks for it, which is the easiest way to pay. Those who are paying for past years, or who want to do it directly, can pull up forms at www.boe.ca.gov.
Q How am I supposed to figure out how much I owe?
A You are supposed to keep receipts of out-of-state purchases and apply your local tax rate – in California that can be 7.25% to 8.75% – to the purchase price. If you don’t have receipts, Gore said the board would accept good-faith estimates.
Contact Kathy M. Kristof at Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St. 90012, or e-mail kathy.kristof@latimes.com.
