and Reporting Use Tax in New York
Ronald J. Huefner and Arlene M. Hibschweiler
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.
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
Purchases on Indian reservations.
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.
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.
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.
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.
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.
Subject to the Use Tax
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.
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.
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
are many types of purchases where a New York taxpayer may
acquire goods or services and not pay the requisite sales
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.
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.
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.
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.
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.
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).
for Taxes Paid to Other Jurisdictions
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.
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.
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;
The buyer has a receipt or otherwise can prove the amount
of tax paid.
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.
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.
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.
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.
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.
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.
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:
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
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.
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
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
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
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:
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
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.
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%.
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:
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
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).
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.
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:
use tax due
(.04 x $20,000) $800
St. Lawrence sales tax paid
(.03 x $20,000) (600)
Edwin’s use tax liability $200
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
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.
J. Huefner, PhD, CPA, is a Distinguished Teaching
Arlene M. Hibschweiler, JD, is an adjunct
associate professor of business law, both at the State University
of New York at Buffalo.