Use Tax Audits Can Be Triggered by Imported Goods
Sarah S. Kim, J.D., LL.M.
04.11.22 | SALT Chat
If you have been reading Berdon blogs for any time now, you are probably familiar with use tax, the other side of sales tax. Use tax is imposed on the user of taxable goods or services when a lesser or no sales tax was collected from the user at the time of purchase. Generally, in your daily life, the tax becomes relevant when you bring or receive goods from out of state, domestically, or internationally.
In recent years, I have advised several individual clients in their use tax audits. The clients, auditing states, durations, and outcomes of all audits varied. But the fact that each audit was triggered by the goods my clients imported from overseas was the same.
Use Tax Audits – the Overseas Connection
State taxing authorities regularly obtain the US customs data on imported goods, from which they identify any taxable goods purchased by state residents without paying sales tax. Initially, the clients were surprised by the audit notice because they were unaware that they owed use tax on imported goods. Also, they were often under the wrong impression that all tax compliance had been taken care of because they paid duty, excise tax, and any related fees associated with the goods when they entered the US. But use tax is separately imposed by state government aside from charges levied by the US government.
How to Report Use Tax
If you are a resident of a state that imposes an income tax, you can report the amount of use tax on your annual state resident income tax return and pay the tax you owe. If your home state does not have an income tax, you have to file a use tax return instead. For example, if you are a Florida resident, you need to file an Out-Of-State Purchase Return (Form DR-15MO) and pay use tax. You may file and pay online as well.
State Response to Noncompliance to Use Tax
Noncompliance detected by the state can easily lead to an assessment notice or an audit. Under audit, generally, a taxpayer is required to provide purchase history for the past three years. This entails obtaining all credit card statements and records of online purchases through third-party facilitators (e.g., Amazon). To mitigate any potential tax assessment, taxpayers must prove to their best ability that they have otherwise good sales and use tax compliance history (i.e., remitted self-assessed use tax for purchases they did not pay sales tax). This could be a burdensome and time-consuming process.
So on your next trip abroad, remember use tax liability when you acquire an asset to bring home.
If you have any questions about sale and use tax, you can reach me at 646.346.6467 | firstname.lastname@example.org or contact your Berdon tax advisor.
Sarah S. Kim is a Senior Tax Manager in Berdon LLP’S State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.