Friday, January 27, 2012


Just about every state resident tax return now has a line for the taxpayer to enter “Use Tax on Out of State Purchases”.  It is line 44 on the NJ-1040 and line 59 on New York’s IT-201.  Many states require that you make an entry on this line – even if it is 0.00.

The instructions for the 2011 NJ-1040 tell us –

If you were a New Jersey resident and you purchased items or services that were subject to New Jersey sales tax, you are liable for use tax at the rate of 7% of the purchase price {the normal NJ sales tax rate – rdf} if sales tax has not been paid.  If sales tax has been collected out of State, use tax is only due if the tax was paid at a rate less than 7%, based on the difference.”

The instructions provide the following examples –

You purchased a computer for $1,500 from a seller located outside of New Jersey and no sales tax was collected.  Your use tax liability to New Jersey on this item is $105 ($1,500  .07 = $105).

On a trip to Maine you purchased an antique desk for $4,000 and paid Maine sales tax at the rate of 5%. The difference, $80 (2% of the purchase price), is due to New Jersey as use tax.”

If you do not know the exact amount of use tax that you would owe some states will provide an “Estimated Use Tax Chart”.  For example, if your NJ Gross Income is between $75,001 and $100,000 the state suggests you claim $53 in use tax.

I expect that at least 98% of all US taxpayers do not claim any use tax on their state return.  And a great majority of the 2% or less who do are employees of a state tax agency.  In my 40 years in the business I have never had a client voluntarily pay state use tax on their state resident income tax return.

There are those who purposefully shop for big ticket items out of state and have the items shipped to their nonresident address in order to avoid paying state sales tax at the point of purchase.  When this is done the purchaser is liable for use tax on the purchase in his home state.

The at the time Director of the NJ Division of Taxation Robert Thompson told the NJ-NATP annual Famous State Tax Seminar a story several years ago where an attempt to avoid paying sales tax backfired.

The NJ Division of Taxation has had success in sales and use tax enforcement.  In one instance the Division got a hold of the names and addresses of NJ residents who had purchased jewelry from a store just over the border in NY and had the items shipped to their NJ address, and therefore did not pay NYS sales tax.

The NJDOT send a letter, and a use tax bill, to each name on the list.  One of these mailings was opened by the wife of a NJ doctor who thought there was an error on the billing.  The wife called the NJ Division of Taxation and told them –

“You have made a mistake on your billing.  My husband only purchased one diamond bracelet.”

The husband, who apparently purchased matching diamond bracelets for his wife and his mistress, should have paid the sales tax upfront!

If you were a totally honest taxpayer, and in 2011 you did pay use tax on out of state purchases you made, and you choose to deduct state and local sales tax instead of state and local income tax on your 2011 Schedule A, and you elect to deduct the actual tax paid instead of using the optional tables you can also deduct the use tax you paid.  According to the instructions for Schedule A (highlight is mine) –

Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) you paid in 2011”.  



Peter Reilly CPA said...

I really encourage my clients to take the question seriously. Massachusetts has a fairly nasty negligence penalty and I am worried that they will go on a crusade one of these years.

It is really not plausible for most people to not have some use tax liability from either ordering stuff over the internet or travelling to low tax states and bringing back tchotchkes.

Daniel Milstein said...

That is true. As an author and business man, I can relate to how you said, "When this is done the purchaser is liable for use tax on the purchase in his home state". I hope more people discover your blog because you really know what you're talking about. Can't wait to read more from you!

Chris said...

The state are always tougher to deal with than the IRS

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Robert D Flach said...


Thanks for the kind words!


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