Calculating and Reporting Use Tax in New York

By Ronald J. Huefner and Arlene M. Hibschweiler

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The compensating use tax (the use tax) has existed quietly as a component of the sales tax system. It recently attracted new attention when New York State incorporated a self-assessment provision on its 2003 personal income tax return forms. New York is one of 19 states adopting such an approach this year.

Purchasers of subject goods and services pay sales tax to the seller as part of the sales transaction; the seller acts as an agent of the state for the collection and transmission of the sales tax. The use tax, on the other hand, is an after-the-fact, direct payment to the state upon the purchase of subject goods and services where, for various reasons, the seller did not collect the tax. The following are transactions in which the seller typically does not collect the tax:

  • Purchases from nonlicensed vendors (primarily individuals) within the state.
  • Purchases of goods outside the state, where a sales tax may or may not be paid to the state of purchase and the goods are brought back into the state by the purchaser.
  • Purchases from out-of-state vendors via mail order or the Internet.
  • Purchases on Indian reservations.

In addition, use tax may be owed to the taxing authority of the taxpayer’s residence on transactions within the state but in another taxing district, where a sales tax has been paid.

While this “leakage” in the sales tax system has always occurred, there is reason to believe that its magnitude is increasing. Mail order transactions have long existed, but Internet sales are a relatively recent phenomenon. Economic activity on reservations seems to be increasing, much of it linked to the growth of casinos. Furthermore, as sales tax rates increase in many jurisdictions, consumers may have greater motivation to find a supply source which does not charge the tax.

Historically, the state has had limited ways to identify such transactions and enforce collection of the use tax, especially for individual taxpayers. Identification of transactions is less problematic for business taxpayers because businesses are subject to sales tax audits (especially if they are registered vendors) and they have incentives to be diligent about the required record keeping. Individuals have paid use tax for many years on a few transactions, such as the registration of motor vehicles purchased from a private seller. For most individual transactions, however, there has been little awareness of the tax obligation, no clear mechanism to pay it, and no effective means of administration and enforcement by the state. The new self-assessment as part of individual income tax reporting makes individual taxpayers more aware of the use tax, provides the mechanism to pay, and incorporates use tax enforcement into income tax enforcement.

The New York State personal income tax return for 2003 contains a new line, Line 56, requiring an amount representing the taxpayer’s determination of the use tax due for the year. Some have expressed concern that failure to enter some amount on the line, even if that amount is zero, will cause the return to be rejected. In addition, the statute of limitations on any use tax that may be owed will not begin to run if Line 56 is left blank.

Estimates of the potential revenue vary widely. New York’s budget office anticipates about $2.5 million; legislative estimates at time of adoption tended to run about 10 times that amount. Two states that have prior experience with this approach, Michigan and Utah, reported revenue generation of $3.1 million and $250,000, respectively, in 2001. Compliance percentages (taxpayers who reported and paid a use tax) for 2001 were 1.6% in Michigan and 0.58% in Utah.

Items Subject to the Use Tax

In general, the use tax applies to items that would be subject to a sales tax if they were acquired in the state by a New York taxpayer from a registered vendor (i.e., one who is authorized to collect sales tax). The tax applies to goods and certain services brought into the state and consumed here. Goods and services bought and consumed outside the state while traveling, for example, are not subject to tax.

The applicability of use tax to services varies. Where services attach to tangible personal property, such as repair services, a use tax applies if the property is brought back into the state. For example, if equipment is sent out of state for service, the work is subject to use tax upon its return to the New York taxpayer. In addition, services on real property, such as lawn maintenance or house repairs, are subject to the use tax. This would apply, for example, when the services are rendered by an out-of-state contractor or by an unregistered provider.

In addition to services relating to tangible personal or real property, three other types of services are specified as being subject to the use tax: information services, interior decorating and design services, and protective and detective services.

There are many types of purchases where a New York taxpayer may acquire goods or services and not pay the requisite sales tax:

  • Purchases from individuals, such as through the classified ads in the newspaper or at garage sales. These purchases may be substantial in amount, and some individual items, such as furniture or lawn and garden equipment, could exceed the $1,000 threshold, above which individual accounting is required. Publication 774 states, however, that only “garage sale items costing more than $600” are subject to tax; it is unclear is this applies individually or in the aggregate.
  • Purchases outside the state. Individuals living near state borders may routinely shop for many items out of state. Travelers may purchase items, such as gifts, souvenirs, or collectibles, out of state and bring them back to New York. Many of these purchases may incur a sales tax in the state of purchase, for which a credit may be available. Goods and services purchased and consumed outside the state, such as meals and hotel charges incurred by travelers, are not subject to the use tax.
  • Purchases outside the country. Purchases in Canada may be substantial for individuals living near the Canadian border. Sales taxes paid to foreign jurisdictions, however, are not creditable against the New York liability.
  • Purchases made within New York State but outside the local jurisdiction where the taxpayer resides, if the purchase jurisdiction has a lower rate than the residence jurisdiction.
  • Purchases made via catalogs or the Internet where the vendor does not charge New York sales tax or does not charge the full rate applicable to the taxpayer’s place of residence.
  • Purchases made on Indian reservations.

Given the large variety of circumstances where an individual may
purchase otherwise taxable goods and services but not pay the tax at the point of purchase, it is likely that nearly all taxpayers in fact have some use tax liability.

Normally, the base on which the use tax is computed is the purchase price, including any shipping and handling charges. One exception occurs in the case of goods used outside the state for a period of six months or more before being brought into New York, such as items used at an out-of-state vacation home. The tax base for such items is the lower of the purchase price or the fair market value when brought into the state. Individuals who move into New York are not subject to a use tax on the goods they bring with them.

The $1,000 Threshold

Purchases subject to the use tax are subdivided into two categories: those costing less than $1,000 each, and those costing $1,000 or more. The latter must be accounted for specifically; the former may be itemized, or an amount from the tax table may be used. Presumably, some disputes will arise as to the definition of a “single unit” for purposes of this test.

Many, probably most, individual purchases will fall under the $1,000 threshold. While the transaction amount subject to use tax generally includes any shipping and handling charges, these are disregarded for purposes of using the table to determine whether a transaction falls below $1,000. For these purchases, the taxpayer may calculate the exact amount due or may rely on a “safe harbor” chart that gives an amount of use tax based on income. The tax amounts range from $6 for federal adjusted gross incomes up to $15,000, to $200 for incomes above $579,710. Assuming an 8% sales tax rate, the equivalent amount of purchases subject to use tax that is implied by Exhibit 1 amounts ranges from $75 to $2,500.

Taxpayers using the table amounts presumably will not be challenged on any subject purchases below $1,000. No documentation is needed, no calculations of use tax are required, and no credits are allowed. Individual purchase transactions in excess of $1,000 must be treated separately, and any use tax owed on such purchases, net of any applicable credits, must be added to the table amount (or to the actual amount, if the taxpayer chooses to use actual purchase data).

Credit for Taxes Paid to Other Jurisdictions

Any calculation of use tax based on actual purchase data may be reduced by a credit for sales tax paid to certain other states, or to other jurisdictions within New York State. The credit rules can be quite complex, as illustrated below.

Purchases made outside the United States. Sales-type taxes, by whatever name (e.g., value-added taxes), paid to any jurisdiction outside the United States, are not eligible for credit against New York use tax.

Purchases made in other states. The calculation of use tax due in connection with an out-of-state purchase depends upon the jurisdiction in which the sale transaction took place. New York allows a credit for sales or use tax paid in another state or the District of Columbia provided all of the following requirements are met:

  • The state or locality where the purchase occurred offers a corresponding credit for tax paid in New York;
  • The buyer was legally liable for and actually paid the tax to the other jurisdiction;
  • The purchaser cannot claim a refund from the other state; and
  • The buyer has a receipt or otherwise can prove the amount of tax paid.

The rules applicable to the various states are detailed in Publication 39, A Guide to New York State Reciprocal Credits for Sales Taxes Paid to Other States, available at www.nystax.gov.

Four states—New Hampshire, Delaware, Oregon, and Montana—do not impose a sales tax. In addition to these four no-tax states, New York’s Publication 39 lists Alaska as having no sales tax. Other sources indicate that, while Alaska has no statewide sales tax, it does have local sales taxes ranging from 1% to 7%. Presumably, no credit is available for the local Alaska sales tax, inasmuch as New York designates Alaska as a no-tax jurisdiction.

Example: David buys a bread machine from a catalog supplier based in Manchester, New Hampshire. He must pay a use tax on the full cost of the machine without any offsetting credit. If the bread machine cost $300 and David lives in Chemung County, the purchase will generate use tax of $24.75 ($300 x .0825), unless the taxpayer chooses to calculate his liability using the income-based tables described above.

For those states that do impose a sales or use tax, the amount that can be credited against the state and local New York obligation depends on how the purchase jurisdiction treats tax paid by its citizens on items bought in New York.

If the state where the purchase occurred allows a reciprocal credit for both the state and local portion of the tax, then New York’s credit is the sum of the state and local taxes paid by the buyer in the purchase state. If the total tax paid in the purchase state exceeds the total due in New York, no refund is available.

For purchases made in the 35 states (including the District of Columbia) listed in Exhibit 2, New York allows a credit against its state and local tax for both state and local tax paid. For some items such as motor vehicles, however, a New York buyer may have to apply to the state of purchase for the credit or refund. Other special rules may apply.

Example: While on vacation in Florida, Donna purchases a piece of artwork for her home in Albany County. The state and local tax rates in the Florida location where Donna bought the work total 7.5%. Donna paid $10,000 for the art; the combined tax rate in Albany County is 8.25%. Donna calculates her use tax due as follows:

N.Y. use tax liability
(.0825 x $10,000) $825
Less credit for tax paid in Fla.
(.075 x $10,000) (750)
Additional N.Y. tax due $ 75

Had Donna bought the art in Arizona, and paid a combined state and local sales tax of 10.10%, she could not have claimed a refund for the additional $185 ($1,010 – $825) of tax she paid. If Donna had spent $30,000 on the art, she would have been required to file Form IT-135, Sales and Use Tax Report for Purchases of Items and Services Costing $25,000 or More, in addition to her Line 56 compliance obligations.

If the state where the purchase occurred allows a reciprocal credit only for New York’s statewide tax, the use tax credit is limited to the New York State portion of the use tax obligation (not the local portion) and cannot exceed the amount of state tax the New York buyer paid in the purchase jurisdiction.

If the state where the purchase occurred allows a reciprocal credit only for New York’s local taxes, then the New York credit is limited to the local share of the New York use tax and cannot exceed the local tax paid in the purchase state.

In order to calculate the credit for purchases made in such states, a taxpayer must know the separate amounts of state and local sales tax paid in the jurisdiction where the item was bought, the amounts of state and local tax due in New York, or both. In some cases, such as Georgia, credit for the state or local portion of the New York tax is limited to the amount of state or local tax, respectively, paid in the purchase jurisdiction. Other examples include states where no credit is allowed against New York’s local tax for any tax paid at purchase, and states where no credit is available against New York’s local tax and local tax paid in the purchase jurisdiction cannot be used to offset the New York statewide tax. Again, special rules may apply. Exhibit 3 lists the states falling into these varying rules categories.

Example: Janet buys a computer from a manufacturer located in Minnesota for $1,500. Janet resides in Suffolk County, where the combined state and local use tax rate is 8.75%. According to Publication 39, New York allows a reciprocal credit only for the state portion of any sales or use tax paid in Minnesota, and Minnesota taxes cannot be used to offset local New York obligations. That means that if Janet pays a total Minnesota sales tax on her purchase of 7.5%, consisting of a 6.5% statewide obligation and a local tax of 1.0%, she has a potential credit against her New York liability of $97.50 (.065 x $1,500). Janet calculates her New York tax as follows:

State use tax liability
(.0425 x $1,500) $63.75
Less credit for state
tax paid to Minn. (97.50)
State use tax due 0
Local use tax due
(.045 x $1,500) 67.50
Janet’s use tax liability $67.50

Janet cannot offset the local use tax she owes to Suffolk County with any of the tax she paid to Minnesota. Her total tax bill on the purchase therefore is $180.00 ($97.50 + $15.00 + $67.50). If Janet had bought her computer locally and paid sales tax at that time, her tax obligation would have amounted to $131.25 (.0875 ¥ $1,500). This means Janet paid additional tax of $48.75 because Minnesota’s state sales tax exceeds New York’s state use tax.

Example: Valerie travels to Wisconsin on business. While there, she purchases an antique necklace. Valerie spends $7,000 on the jewelry and pays 6.0% sales tax, consisting of local tax of 1% and a statewide obligation of 5%. Valerie is a resident of Chautauqua County, where the combined state and local tax rate is 7.25%.

According to Publication 39, state tax paid in Wisconsin can offset the state portion of New York’s use tax. Similarly, local sales tax paid in that state offsets local New York tax. New York state use tax cannot be offset by local Wisconsin tax, and Wisconsin state tax cannot be applied against local use tax. This means Valerie must calculate her state and Chautauqua County tax liabilities separately, as follows:

State use tax liability
(.0425 x $7,000) $297.50
State sales tax paid in Wisc.
(.05 x $7,000) 350.00
State use tax owed N.Y. 0
Local use tax liability
(.03 x $7,000) $210.00
Local sales tax paid in Wisc.
(.01 x $7,000) 70.00
Local use tax owed $140.00

Even though Valerie paid more state sales tax in Wisconsin than her corresponding New York statewide tax liability, she cannot use the surplus credit to offset her local use tax obligation. This means Valerie will pay total sales and use tax of $560 ($420 paid in Wisconsin plus $140 local use tax paid to New York).

Purchases made within New York. Use tax may be due for purchases made within New York State if the purchase jurisdiction has a lower local rate than the taxpayer’s home jurisdiction. The taxpayer owes use tax for the difference.

Example: Edwin is a resident of Erie County, where the combined state and local sales tax rate is 8.25%. While on vacation in St. Lawrence County, Edwin buys a $20,000 tapestry to display in his home. The sales tax rate in St. Lawrence is 7.25%. Edwin calculates his use tax liability as follows:

Erie use tax due
(.04 x $20,000) $800
St. Lawrence sales tax paid
(.03 x $20,000) (600)
Edwin’s use tax liability $200

On the other hand, if Edwin had bought the tapestry in Erie County for use in his St. Lawrence County home, he apparently would not be entitled to a refund of the additional sales tax paid.

Enforcement

New York has the authority to assess unpaid sales or use taxes and to collect penalties and interest from taxpayers who are delinquent on these obligations (Publication 774, Purchaser’s Obligations to Pay Sales and Use Taxes Directly to the Tax Department—Questions and Answers). New York’s Tax Commissioner, Andrew Eristoff, has conceded, however, that it will be difficult to verify that taxpayers are reporting their Line 56 obligations fully. Eristoff has been quoted in newspaper articles as stating that entry of “zero” on Line 56 will not, by itself, trigger audit of a tax return. The Commissioner cautioned that the Tax Department would rely on other sources, including the U.S. Bureau of Customs and Border Inspections, to identify New Yorkers with unreported use tax obligations.


Ronald J. Huefner, PhD, CPA, is a Distinguished Teaching Professor and
Arlene M. Hibschweiler, JD, is an adjunct associate professor of business law, both at the State University of New York at Buffalo.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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