What is a use tax? Is it effective?

According to the Department of Revenue (DOR), a use tax is a tax on the use of goods or certain services in Washington when sales tax has not been paid. Also, goods used in this state are subject to either sales or use tax, but not both. So the use tax compensates when sales tax has not been paid.

There are a few instances when you owe a use tax over a sales tax. If you buy something in another state that does not have a sales tax or a state with a sales tax lower than Washington’s, then you owe a use tax.  For example, if you buy something in Oregon that is used in Washington then you’re subject to the use tax.  The third option is if you buy something from someone who isn’t authorized to collect sales tax.  This happens if you buy something through a newspaper classified ad. Lastly, if goods are purchased by out of state by subscription, through the Internet, or from a mail order catalog company and they don’t collect Washington’s sales tax, you owe the use tax.

The use tax was created by the Revenue Act of 1935 (read Justin's entry about it here) along with a majority of Washington’s tax structure.   As we’ve discussed in other posts, this system reflects an economy from 80 years ago that doesn’t adequately collect taxes in today’s Washington.  According to the Economic and Revenue Forecast Council and DOR, about half of all online sales to Washington residents go untaxed. Rather, the tax isn’t collected although its payment is legally required in the form of an equivalent use tax.

A use tax is required when sales tax isn’t collected for online sales but it’s up to citizens to know when and how to pay.  How is this enforced? As we move to buying more goods online this gap will only continue to grow when there isn’t a sales tax being collected.  There’s an incentive for businesses to be on top of this due to DOR’s ability to audit them, but it’s highly unlikely DOR would audit citizens for online purchases from sites such as Craigslist. This would be expensive, hard to implement, and hard to enforce.

As it’s currently configured, the use tax isn’t an effective method for ensuring compliance when the sales tax isn’t collected.  However, the online sale of goods and services has changed the economy in a way that states can’t adequately adapt to.  A key reason for this is federal legislation about Internet taxation; we’ll talk about that next time.