Use Tax on Equipment and Supplies Bought Online or Out of State

Do I owe use tax on equipment bought out of state without sales tax?

You generally owe use tax when three things are true: your state taxes the item, the seller charged no tax (or less than your state's full rate), and you use or store the item in your state. Use tax is the buyer's version of sales tax: the buyer works out the tax and pays the state directly. It reaches online, mail-order and out-of-state purchases by businesses as well as individuals (Washington DOR; California CDTFA).

Use tax is state law, so forms, due dates and rates differ. This page gives the pattern every state shares and compares California, New York, Texas and Washington. For any other state, find on its revenue department's site whether it taxes your item, which return reports the tax, and whether it credits tax paid to another state.

A case is not simple when:

• purchases span several years or several states;
• you gave a seller a resale or exemption certificate for equipment;
• an item was used in more than one state;
• equipment was delivered to an owner or employee in a state other than the business's home state;
• a vendor is billing years of tax, or a state has written to you.

In those cases the amount depends on the state and period of each purchase, so the invoices need sorting by state and period before any payment or reply to a notice. Gather the untaxed invoices, the state each item was delivered to and used in, the date each was first used, and whether the business holds a sales tax permit there. Most of the work is finding the untaxed invoices: check each vendor invoice for a tax line.

Sales tax vs. use tax: what is the difference?

Sales tax is collected by the seller at the sale. Use tax is owed by the buyer when sales tax was not paid. An item is taxed once: Washington says items used in the state are subject to sales tax or use tax, not both on the same transaction (Washington DOR).

Some sellers collect use tax themselves on out-of-state shipments; a line labeled "use tax" on an invoice is this same tax, not a second one. In California and Texas, a buyer who pays the tax to a retailer engaged in business in the state (or authorized to collect it) and receives the required receipt owes nothing further (California R&TC 6202; Texas Tax Code 151.102). A Texas buyer whose remote seller charged both state use tax and the single local use tax owes nothing more. If the seller charged less than the full combined rate, the buyer owes the difference (Texas Comptroller; New York TB-ST-910).

Which purchases does use tax reach, and which does it leave out?

Use tax reaches what the state's sales tax reaches, bought without tax and used in the state (California CDTFA; New York TB-ST-910). It leaves out most of what sales tax leaves out, and what is not used in the state, but the two exemption lists do not always match.

A resale or reseller certificate is for goods you will sell, not for equipment. Washington adds a penalty of 50% of the tax when a buyer improperly uses a reseller permit, on top of the tax and interest, and waives it only in limited cases (RCW 82.32.291; Washington DOR). For buying inventory tax-free, see resale certificates and sales tax refunds.

Taxable services bought from outside the state and used in it follow the same rule in states that tax them. Whether a service, software subscription or digital product is taxable is a state-by-state question, so check your state's revenue department; sales tax on SaaS and software covers which states tax them, from the seller's side. A contractor's materials follow separate rules: see contractors' sales tax on materials.

Which state and rate apply: where do I first use the item?

Use tax goes to the state where the item is used, at the combined state and local rate there. Washington sets the rate by where the buyer first uses the item. New York uses the rate where the item is delivered or used, whichever is higher (Washington DOR; New York TB-ST-910). Texas and California tax what is stored or used in the state (Texas Comptroller; California CDTFA).

Washington and New York tax the price including shipping and delivery charged by the seller, and Texas taxes delivery charges tied to a taxable item. In California, shipping by common carrier or US Mail is generally not taxed when the invoice states it separately and charges no more than the actual cost; handling is taxed (Washington DOR; New York TB-ST-910; Texas FAQ; CDTFA business use).

Bringing equipment you already own into a state can also trigger that state's use tax, subject to its exemptions. For equipment already used elsewhere, the taxable value can differ from the price. New York taxes the lesser of the price or market value after more than six months of use outside the state, and lets a contractor elect fair rental value for property used in New York on a contract under six months (TB-ST-910). Washington uses the retail selling price of similar products when the price does not show true value (WAC 458-20-178).

I paid sales tax to another state on the same purchase: do I get credit?

Often yes. California, New York, Texas and Washington each credit sales or use tax legally paid to another state on the same item against their own use tax, on their own conditions. The credit never exceeds the home state's tax, so a higher rate elsewhere gets no refund from the home state.

• Texas: credit for a similar tax paid to another state, but only if that state gives Texas taxpayers a similar credit (Tax Code 151.303; Texas Comptroller). The Comptroller's older Form 01-156 says use tax is due regardless of tax paid elsewhere; the statute governs.
• Washington: credit for a legally imposed retail sales or use tax paid to another state or to a foreign country or its subdivision (RCW 82.12.035).
• California: credit to the extent a retail sales or use tax was paid to another state before the item came into California, up to California's tax (R&TC 6406).
• New York: a reciprocal credit with conditions. The other state must give New York a matching credit (New York may allow only the state part or only the local part), you must have been legally liable for the tax and paid it, it must be a sales or use tax you have no right to get refunded or credited, and you need proof such as a receipt. Foreign taxes and customs duties do not count (TB-ST-765).

If the credit is smaller than your state's tax, the difference is use tax. Tax a seller charged in error was not legally due, so these credit rules generally do not cover it; the fix is a refund request to the seller, covered in resale certificates and sales tax refunds.

How do I report and pay use tax: sales tax return, use tax return, or income tax return?

Report it on your sales tax return if the business holds a permit or account in that state. Otherwise use the state's separate use tax return or, for some sole proprietors, the income tax return. California and Washington tie the report to the period you first use the item.

In New York, only a sole proprietor may use the income tax return; a partnership, LLC or corporation that is not registered or required to be registered files ST-130, and one that is must report on its sales tax return. Return schedules are covered in filing sales tax returns.

A vendor forgot to charge sales tax and now bills years of it: who owes it?

The tax is owed once, but the state can look to the buyer, the seller or both. First work out which tax applies. In California, tax on a retail sale by a retailer in the state is the retailer's sales tax; whether the retailer can bill you for it depends on the sale agreement, and use tax is mainly the buyer's tax on out-of-state and online purchases (CDTFA; Regulation 1700). Where use tax applies, a seller that should have collected is liable for the tax it missed, and the buyer owes use tax directly. In California and Texas, paying the vendor settles the buyer's side only when the vendor is engaged in business in the state (or authorized to collect) and gives the required receipt; New York and Washington are covered below.

• The seller is liable. Washington and New York make a seller required to collect personally liable for tax it did not collect (RCW 82.08.050; New York Tax Law 1133). Texas says a seller that does not collect and remit the correct amount can owe the tax plus penalties and interest (Texas FAQ).
• The buyer is liable too. The buyer's liability continues until the tax is paid to the state, except that payment to a retailer engaged in business in California or Texas (or authorized to collect), with the required receipt, ends it (California R&TC 6202; Texas Tax Code 151.102). In New York, a customer who has not paid the vendor must pay the Tax Department directly and file a return within 20 days of the date the tax was due (Tax Law 1133; TB-ST-910).
• Washington can go to the buyer. Until it is paid to the seller or the department, the tax is a debt from the buyer to the seller. When the seller has not paid the department, it may collect directly from a buyer who did not pay the seller and add a penalty of 10% of the unpaid tax (RCW 82.08.050).

Before paying a vendor's back bill:

1. Confirm the sale was taxable and the item was used in the state. If you gave the vendor a resale or exemption certificate, the use tax is yours and the bill may be wrong.
2. Ask for a corrected invoice that shows the tax by invoice and period, and the vendor's registration number for your state. In California and Texas, a receipt ends your liability only if it comes from a retailer engaged in business in the state or authorized to collect the tax; the registration number helps you check.
3. The tax is owed once, but who can take it depends on the state. Payment to the vendor ends the buyer's side only where the state says so (California and Texas: a vendor engaged in business in the state or authorized to collect, with the required receipt). Where the buyer pays the state, tell the vendor so it does not bill the same tax again. Keep the corrected invoice and proof of payment either way.
4. Subtract only the credit your state allows for tax paid to another state on the same item, with proof of payment.

Whether a vendor may bill a customer for tax it failed to charge depends on the contract, the invoice wording and the state; New York gives a vendor the same right to collect it from the customer as if it were part of the price, and Washington treats the unpaid tax as the buyer's debt to the seller. The seller's side is in invoices sent without sales tax. Whether interest and penalties follow the tax, and who bears them, is worth settling before you pay.

How do I book use tax: part of the cost of equipment, or an expense?

Use tax is part of the cost of what you bought, not a separate deduction. The IRS says to treat sales tax paid on the purchase or use of property as part of the cost: for equipment, add it to the cost you depreciate; for supplies and other deductible costs, deduct it as part of that cost (Publication 334; Publication 551; 26 U.S.C. 164).

Record the tax payable with the purchase. The return period is set by the state: California and Washington use the period the item is first used.

Depreciation and Section 179 are covered in writing off equipment in the first year. Tax you collect from customers is booked differently: see sales tax journal entries.

What records show what I bought, what was taxed and where I used it?

Keep, for each untaxed purchase:

• the invoice: date, item, price, shipping, and whether tax was charged and at what rate;
• the delivery address and the state where the item was first used or stored;
• the date first used, which sets the period;
• your permit or account number for that state, or a note that you have none;
• any resale or exemption certificate you gave the seller, and what you used the item for;
• proof of tax paid to another state, such as a receipt showing the amount or rate (New York requires it for the credit);
• the return and the payment confirmation.

Texas requires a purchaser who uses taxable items in the state to keep sales and use tax records for at least 4 years, longer during an audit or appeal (Texas Comptroller). For a state notice or audit, see sales tax audit.

What if I never reported use tax in earlier years?

Use tax is owed whether or not it was reported, and late use tax can carry penalties and interest (California R&TC 6591; New York TB-ST-910). How far back a state can assess depends on the state. Texas generally allows 4 years from the due date, but not when no report was filed, when the tax due is 25% or more above what was reported, or on fraud (Texas Tax Code 111.201 and 111.205). California generally allows 3 years after the last day of the month following the quarterly period (the one-year period for annual filers) or after the return is filed, whichever is later, and 8 years after that same month-end when no return was filed; fraud or intent to evade is outside the limit (California R&TC 6487). Rebuild the purchases first. What a state will accept (payment with the next return, an amended return or a voluntary disclosure) depends on the state and on whether it has already contacted you.

1. Pull the year's card and bank transactions for online and out-of-state vendors and open each invoice. List the ones with no tax line, or less tax than your state's full rate, by state of use and the period you first used the item.
2. Remove what was not taxable, what was used in another state, and what a credit covers.
3. Add penalties and interest. California adds a penalty of 10% of the unpaid tax plus interest from the due date (R&TC 6591).
4. Find out which routes the state still offers.
5. Book it. Use tax goes into each item's cost (equipment) or the expense (supplies), as above. Record penalties and interest in their own accounts, not in the item's cost, and ask your preparer how earlier years' depreciation and the income tax return are affected.

Some states let a business come forward before the state contacts it. Texas's voluntary disclosure program is open to a business that has not been contacted about the liability or notified of an audit. It reviews reports due in the four years before the business first contacts the Comptroller and waives statutory penalties and, in most cases, interest (Texas Comptroller). California's CDTFA says a business late with use tax may be eligible to pay a prior-year liability and avoid late payment penalties under its In-State Voluntary Disclosure Program; the state sets eligibility (CDTFA business use). Other states' programs differ; see catching up on uncollected sales tax.

New York says it audits routinely and gets information on sales to its residents from other states under information-exchange agreements; other states' practices differ (TB-ST-910). If a state has already written to you, a voluntary program may be closed; see sales tax audit.

Example

All figures are illustrative and in US dollars.

A Texas consultant buys furniture online

A consultant with a Texas sales tax permit buys $4,000 of office furniture from an out-of-state website that charges no tax. At a combined rate of 8.25%, Texas use tax is $330. The consultant reports the $4,000 in Item 3, Taxable Purchases, on the next regular return and pays the $330 with it. The furniture's cost becomes $4,330.

A New York LLC gets a vendor's back bill

A vendor never charged tax on $20,000 of equipment delivered three years ago and now bills about $1,600, an assumed 8% combined rate. The tax is owed once. Assume the LLC is not registered for sales tax. Because it has not paid the vendor, New York's rule is that it pays the Tax Department directly, on Form ST-130 (a registered business would use its sales tax return). It keeps the invoice and proof of payment and tells the vendor so the tax is not billed again. Interest and penalties for the unpaid years are separate and need checking. The equipment's cost rises from $20,000 to $21,600; how that changes depreciation for years already filed depends on the method and when the tax is accrued.

A Sacramento contractor buys a tool

A contractor with a California seller's permit buys a $12,000 tool from an out-of-state seller that charges no California tax. At an assumed 8.75% combined rate, use tax is $1,050. The contractor reports the $12,000 as "Purchases subject to use tax" on the permit return for the period the tool was first used. The tool's cost becomes $13,050, the amount depreciated or expensed under the contractor's method.

Different for you?

• Years of online or out-of-state purchases were never taxed, a state has written, or a vendor is billing several years: the tax depends on the state and period of each purchase, and the books and asset costs change once it is paid. Rebuilding the purchase records by state and period and setting up the ongoing use tax entry is bookkeeping work; a state letter also belongs with sales tax audit.
• You buy equipment and supplies online or out of state all the time and nothing in your books marks the untaxed invoices: the tax is easy to miss one invoice at a time. A use tax entry that runs with each month's books is bookkeeping work.
• You bought servers for a colocation site: the data center exemption and server-specific credits are in sales tax on GPU servers you buy.
• You used a resale certificate on items you did not resell, or a supplier charged tax in error: see resale certificates and sales tax refunds.
• You are the seller who missed charging tax: see invoices sent without sales tax.
• You are a contractor buying materials: see contractors' sales tax on materials.
• You are a Canadian business paying GST at the border: see GST on imports and customs invoices.