Use tax
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[edit] Self-Assessment
Not all use tax derives from sales transactions. There are also internal transactions a company might initiate that will trigger use tax consequences. For example, ABC Furniture Company buys its inventory tax-free with a resale certificate, then charges sales tax to its customers. But if this company removes furniture from inventory for use in the retail store by its sales staff, it has triggered a tax incident: use tax is due on the converted inventory that is being used, not sold. The states differ in the tax basis of such a transaction: some tax [cost], others [cost + overhead], and still others [cost + overhead + markup].
For another example, suppose a carpet manufacturer sends swatches of carpet to its sales people to use as samples. That is a taxable use of carpeting to the manufacturer (or distributor as the case may be).
Large manufacturers puchase many items that are used in both exempt and nonexempt manners. To facilitate determination of the correct tax due, they use a Direct Pay Permit that authorizes them to omit sales tax to their vendors, while requiring them to self-assess their purchases and remit the correct amount of use tax to the proper taxing authority.
It's also possible that equipment purchased under a manufacturing or mining exemption in one state is later relocated across a state line--into a jurisdiction where the exemption no longer applies. In this case, the company must recognize the book value of the capital item when it was relocated as the basis of the use tax due to the nonexempt state. Another form of use tax related to this example is referred to as reciprocity. Reciprocity is triggered when items taxed at a lower rate are transferred or put to use (subsequent to first use) in a taxing jurisdiction with a higher rate. The use tax due, where StateA is the sending state and StateB is the receiving state, is typically [[[StateB rate - StateA rate] + local rateB] x tax basis]. Most states do not offer reciprocity for their local rates, and they may have specific states they will reciprocate with or they may reciprocate on a quid pro quo basis with the other state.
Tax practitioners in large corporations must always be vigilant of transactions such as the above examples that trigger tax consequences for two reasons: 1) to make sure they are in compliance with state laws, and 2) to take advantage of all possible planning opportunities to minimize or avoid tax. Where the tax consequence is substantive and/or the law is vague, assistance will often be sought from outside professionals such as consultants, CPAs, or attorneys who specialize in sales and use tax and who keep up to date with the changing laws and case law history of the various states.
[edit] Enforcement
In some cases, the taxing jurisdiction cannot always reliably determine whether any of their residents purchased items and then brought them into the jurisdiction. This often results in the submission of any use tax payments as being on the honor of the purchaser. Other states require annual statements, filed under pain of perjury, that the resident has submitted all necessary use-tax payments. The filing of a false document is often a much more serious crime than evading tax on out-of-state purchases. The state of Connecticut Attorney General occasionally publicizes the indictment of a blatant use-tax violator and soon receives millions of dollars from other guilty parties hoping for amnesty.
A number of states have even entered into agreements in which they will allow vendors to share in the proceeds of sales taxes collected from buyers in other states who would not otherwise fall under the vendor's state tax obligation. A registered vendor is provided with tax guidelines by each state for which it will collect "sales" taxes, and may also be granted limited amnesty for sales taxes it failed to collect in the past in registered states.
