The use tax is a complement to the sales tax. Individuals owe the use tax on goods and services purchased outside their state of residence, by mail order, or over the Internet, but it is difficult for states to enforce compliance. Many states provide for individuals to report both state and local use tax liability on the individual income tax return. This policy brief explains the use tax, other states’ efforts to collect it via the income tax return, and options for Minnesota to use the income tax return to increase use tax reporting and collections.
The Use Tax and Collection Methods: A Summary
All states with a general sales tax have also enacted complementary use taxes. In general, a use tax is due on a transaction in which the sales tax is not collected and the good or service is used in the jurisdiction imposing the tax. The use tax equals the state sales tax rate plus the local sales tax rate, if any. For example, if a Minnesota resident travels to a jurisdiction that does not have a sales tax and purchases taxable items to bring home for use in Minnesota, or orders taxable items by mail or over the Internet, a use tax is due to Minnesota on those purchases. The tax equals the sales tax that would have applied if the purchase had been made in Minnesota, less sales tax actually paid where the purchase was made. The use tax is intended to discourage making purchases outside the state to avoid sales tax and to prevent erosion of the tax base. In addition, it helps to put in-state merchants on an equal competitive footing with merchants in lower tax jurisdictions and with merchants who are not required to collect sales tax on sales to Minnesota residents.
Minnesota allows individual taxpayers a de minimis exemption from the use tax. Individuals whose total purchases subject to use tax do not exceed $770 in a calendar year are not subject to use tax.1 Minnesota is one of five states with some form of de minimis exemption for individuals.2
Of the 45 states with sales and use taxes, 38 also have an individual income tax. Of these 38 states, 25 provide for taxpayers to report use tax obligations on the individual income tax return, and another seven, including Minnesota, provide information about the use tax in the individual income tax booklets. The experience in other states and past Department of Revenue estimates suggest the following results for eliminating the de minimis exemption and/or providing for collection on the individual income tax return:
- Eliminate de minimis exemption and provide for individuals to pay use tax on the income tax return. Estimated revenue raised: between $0.4 million and $15.3 million per year3
- Eliminate de minimis exemption and require individuals with purchases of less than $770 to file use tax returns. Estimated revenue raised: $100,000 per year4
- Retain de minimis exemption and provide for individuals with purchases greater than $770 to pay use tax on the income tax return. Estimated revenue raised: minimal5
The Use Tax and Minnesota’s de Minimis Exemption
The use tax complements the general sales tax and is due on transactions in which the sales tax is not collected, but the good or service purchased is used in the jurisdiction imposing the sales tax.6 Use tax typically applies to goods that an individual purchases in one state but uses in another, either by traveling to another state, or by purchasing the good remotely through mail order or over the Internet. The use tax rate equals the state sales tax rate plus the local sales tax rate in effect at the location where the item is used, if any.7
An alternative to the use tax would be to require businesses that make sales through catalogs or over the Internet to collect the use tax at the time a sale is made. However, several U.S. Supreme Court rulings, most recently Quill Corp. v. Heitkamp (1992), have prevented the states from requiring businesses to collect use tax unless the business has a physical presence in the state.8 Because of the complexity of state sales tax laws, the court considered a collection requirement to be an undue burden on interstate commerce.
Twenty-one states are full members of the Streamlined Sales and Use Tax Agreement (SSUTA),9 a voluntary compact that simplifies sales tax collections among the member states. The goal of the agreement is to persuade Congress to intervene and impose a duty on remote sellers to collect sales and use tax in member states. In the meantime, collecting the use tax directly from consumers of goods purchased while traveling, on-line, or through a catalog remains the states’ only alternative to simply foregoing tax revenue owed on remote sales.
States have historically viewed the use tax on individuals as impractical to enforce—the tax typically involves small amounts owed on a large number of transactions for which the individual has not kept records, and the costs of collection could easily exceed the revenues collected. In 1996, the Sales Tax Advisory Council recommended that Minnesota adopt a deminimis exemption from the use tax, recognizing that most taxpayers are unaware of the tax and the Department of Revenue is unlikely to collect the tax due to high administrative costs. The legislature adopted the council’s recommendation, and the exemption took effect in 1997.
Individuals with less than $770 in purchases during a calendar year are exempt from the tax and are able to make incidental purchases by mail order, over the Internet, or while
traveling without keeping records for the use tax. This amount, $770, is the amount of purchases necessary to generate $50 of tax at the 6.5 percent rate in effect when the exemption was enacted in 1997.
Minnesota’s statewide sales and use tax rate is now 6.875 percent, following passage of the constitutional amendment at the 2008 general election.
At the same time the de minimis exemption went into effect, Minnesota began including information on the use tax in the individual income tax instructions, directing individuals with purchases in excess of the de minimis exemption amount to file a use tax return. The box on the right reproduces some of the information provided in Minnesota’s 2010 individual income tax form.
This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, Use Tax Collection on Income Tax Returns in Other States, written by legislative analyst Nina Manzi.
An excerpt from Form M-1 instructions for Minnesota income tax filers
If you purchased items for your own use without paying sales tax, you probably owe use tax. Here are some cases when use tax is due:
- You buy taxable items over the Internet, by mail order, from a shopping channel, etc., and the seller doesn’t collect Minnesota sales tax from you.
- A seller in another state or country does not collect any sales tax from you on a sale of an item that is taxed by Minnesota.
- An out-of-state seller properly collects another state’s sales tax at a rate lower than Minnesota’s. In this case, you owe the difference between the two rates.
If your total purchases subject to use tax are less than $770 in a calendar year, you are not required to file a use tax return. This exemption applies only to items for personal use, not to items for business use.
If your total purchases subject to use tax are $770 or more, you owe use tax on all taxable items purchased during the year.
Source: Form M-1 Instructions, Minnesota Department of Revenue, Tax Year 2011
1 Minn. Stat. § 297A.67, subd. 21. When enacted in 1997, the $770 exemption equaled the amount of purchases necessary to generate $50 of use tax liability at the sales tax rate, which was then 6.5 percent. At the current statewide rate of 6.875 percent, $770 of purchases would result in $53 of use tax liability.
2 California exempts $800 of purchases made in foreign countries and hand-carried into California (Cal. Rev. & Tax. Code § 6405). Michigan does not require taxpayers to pay use tax on purchases valued at less than $10 over the course of a month (Mich. Comp. Laws § 205.94). Missouri does not require a consumer use tax return if purchases total less than $2,000 during the year (Mo. Rev. Stat. § 144.655). Virginia has a de minimis exemption for mail-order catalog sales totaling $100 or less over the course of a year (Va. Code Ann. § 58.1-604(5)). Colorado had a de minimis exemption of $100 in purchases per year for individuals (Colo. Rev. Stat. § 39-26-203), but the exemption was repealed in 2004.
3 Estimate based on other states’ experience with collecting use tax on income tax returns.
4 Minnesota Department of Revenue, Analysis of 1996 Tax Conference Committee Report, April 11, 1996; if this change were proposed now, the revenue estimate would likely increase because of population growth, inflation, and the increase in the sales tax rate from 6.5 percent to 6.875 percent.