Could Charging “Use Tax” on Online Spending Solve the Sales Tax Debate?

by TaxJar November 1, 2020

Sometimes when we are struggling to understand various state sales tax requirements, we can forget that states aren’t actively out to make our lives – personally – a bureaucratic nightmare.

Whether we at TaxJar, or you ,as online sellers, agree with their tactics or not, states are simply trying to collect revenue in order to continue operations. To state and local politicians, asking out-of-state online sellers to collect and remit sales tax on purchases made into their state is often a no-brainer. After all, out-of-state online sellers don’t have a vote come election time. This is why the Marketplace Fairness Act is so troubling.

But we recently read on that Kentucky is taking a different approach to collecting tax revenue on the sale of consumer goods. Instead of threatening to enter into the boondoggle of asking out-of-state sellers to comply with state sales tax laws, they are asking Kentucky taxpayers to pay “use tax” on all out-of-state purchases.

What is a use tax?

Use tax is generally paid by consumers who buy a product without paying their own resident state’s sales tax and then “use” that product in their home state.  As we well know by now, states always have slightly different definitions and requirements when it comes to taxation, and the same goes for use tax.

According to the Kentucky Department of Revenue’s Sales and Use Tax page:

The Use Tax is imposed on the purchase price of tangible personal property purchased for storage, use or other consumption in Kentucky.  The use tax is a “back stop” for sales tax and generally applies to property purchased outside the state for storage, use or consumption within the state.

Kentucky Sales and Use Tax is imposed at the rate of 6 percent of gross receipts or purchase price.  There are no local sales and use taxes in Kentucky.

In other words, buyers of out-of-state products, not online sellers, would be responsible for remitting sales tax to the state of Kentucky should such a purchase take place.

What would a widespread use tax mean for online sellers?

With a use tax, the states still get the benefit of increased revenue but the burden has shifted from online sellers to consumers.

When dealing with Kentucky, out-of-state online sellers are not required to collect and remit sales tax. But, if they sell more than $100,000 into the state of Kentucky in a taxable year, they are required to provide very specific notices to customers detailing the customer’s responsibility to pay use tax.

While I think this is an interesting move by the state of Kentucky, I don’t think it’s going to make anybody – the state, consumers, or online sellers – happy.

Consumers will be required to report use tax on their income tax statements, and if they do not, they could receive penalties if audited. There are a lot more consumers than online sellers out there, and if the state cracks down too much, or if the “estimated” use tax becomes too high, then they could experience a huge backlash.

States might have difficulty enforcing a use tax. It would, of course, be impossible to tax every consumer on every single out-of-state purchase, which is why many states have adopted a “use tax table.” (Ex: North Carolina.) This adds an extra tax burden on consumers that may not go over well in this anti-tax climate.

Out-of-state online sellers may not have to worry about registering, collecting and remitting sales tax in Kentucky, but that doesn’t negate the complexity of compliance with other state’s sales tax laws.

Take Amazon FBA sellers, for example. Even if the need to deal with Kentucky sales tax magically disappeared, they would still be struggling with compliance in 14 other states. The Kentucky exception would be a drop in the bucket.

Of course, your mileage may vary. What is your opinion on use tax vs. sales tax? Thinking as a consumer, would you be willing to pay use tax, even if that increased your tax burden?

We look forward to hearing your opinions and/or theories on Kentucky’s action.

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