What you should know about use tax
In last month’s blog, I shared about sales tax and the most common concerns clients have about when to collect it and how to submit tax. Before that, we talked about franchise tax. Now it’s time to share a little bit about use tax, which is possibly the most complicated of the three!
The biggest questions about use tax center around who owes it and who pays it. Sounds simple, but it can get complicated. I encourage you to ask questions from your bookkeeper and the state if necessary if you find yourself getting confused.
What is use tax?
Investopedia does a good job of explaining financial terms in a simple way. They define Use Tax as “a sales tax on purchases made outside one's state of residence for taxable items that will be used, stored or consumed in one's state of residence and on which no tax was collected in the state of purchase. If the purchase would have been taxed if it was made in the purchaser’s state of residence, then use tax is due.”
Essentially, use tax is like sales tax in that it’s almost always the same amount (in Arkansas, that’s 6.5%) and both assessed on the end consumer of eligible tangible goods and services. The big difference is that sales tax is always collected by the seller who then remits the tax to the state on the user’s behalf. Use tax, however, is self-assessed and remitted by the end consumer. Often the use tax is harder to enforce because it requires the user to self-assess and remit. It is often usually just applied to large purchases of tangible goods even though technically it applies to any tangible goods or services.
Who owes sales tax
If you purchase goods in another state and pay less than you would in Arkansas, you owe Arkansas the difference. According to the Arkansas Department of Finance and Administration, “if you legally paid sales tax on the items in the other state, you could be entitled to a tax credit for the tax paid to the other state against the tax due Arkansas. If you pay less than the Arkansas tax rate to the other state, you must pay Arkansas the difference.”
The DFA further explains that anyone who fits under these conditions owe use tax:
Purchased items outside Arkansas that would be taxable if purchased in Arkansas (including items from catalogs, by mail, or via the internet)
Use, store, consume, or distribute the purchased items in Arkansas, and
Have not paid Arkansas sales tax (or an equivalent amount) to another state (excludes motor vehicles).
How do I pay it
The Arkansas DFA website has several helpful tools to help you figure and pay the use tax you owe. You can also find information about how to get a Sales and Use Tax permit and how to sign up to pay the use tax online.
Are you needing help understanding use tax and how it applies to you? Email me and let’s discuss!