The Inter-State Dilemma
No, we're not discussing the morning commute here but, rather, the inter hyphen state dilemma as it relates to income tax and Sales/Use tax. For instance, what do you do when making a purchase across state lines? What about Internet purchases? Are you liable to your resident state for sales tax?
Many of our Vermont clients had a rude awakening to this dilemma over the summer when the Vermont Department of Taxes mailed 20,000 letters explaining the rules for Use Tax. But this isn't a law specific to Vermont and it's not new, contrary to popular belief. It's simply an untapped, and previously not very well enforced, revenue source that applies to individuals and businesses.
So what is Use Tax?
Wikipedia defines it as "...a type of excise tax levied in the United States by numerous state governments. It is assessed upon tangible personal property purchased by a resident of the assessing state for use, storage, or consumption in that state (not for resale), regardless of where the purchase took place."
Simply put, if you go across state lines and make purchases tax free, you owe Use Tax to your resident state. If I, as a Vermont resident, buy a tractor in NH, I now owe 6% in Use Tax to VT.
What about online purchases?
The same deal applies. If you buy something from Amazon and they don't collect sales tax from you, you will need to remit it on your own. "But Amazon collects sales tax now!" Be careful here... Sometimes you're not really buying from Amazon, but from a 3rd party retailer selling through Amazon (commonly referred to as Fulfilled By Amazon). And these 3rd parties are not required to collect sales tax. So watch those invoices closely.
"How will the government ever know if I don't remit?" In Vermont and many other states, there is new legislation that requires online and out-of-state retailers exceeding certain sales thresholds to provide a list of customers to each customer’s state of residence. This is allegedly just a list of names and a total amount spent with that retailer. It won't specify what was purchased but could be instrumental in starting the audit process should the remittance line remain blank on your state tax return.
Of course, all usual exemptions still apply. In Vermont, we don't pay sales tax on most clothing and food purchases, therefore Use Tax does not apply. It helps to know the exemptions in your state. Of course, we're happy to do the research for you.
So that's Use Tax.
But how do you know if you owe income tax to another state? I know what you're thinking... "My office is in my state of residence so I pay tax to that state, and that state only!" But that’s not the case. The rules for each state are different and very complicated. If you are conducting business in a state other than the one in which you reside (meaning, you have clients who live in another state), we recommend contacting your tax professional and discussing the implications.