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Use Tax – What and Why?

 A Substitute for Sales Tax

Use Tax is essentially a substitute for Sales Taxes.  It has been in the Michigan tax law (and virtually every other state) for a very long time but now there is much more enforcement in Michigan, even asking on both business and personal returns if you owe any.  It is the same rate as the Michigan Sales Tax, currently 6%.

This article is particularly about Michigan and the laws may, and usually do, differ in other states—but it still provides some general context.

Michigan Use Tax Form

You should care about this because not paying (or being underpaid) may result in tax deficiencies, underpayment penalties and interest.  Underpayment penalties and interest rates are substantial in Michigan—ugly!

Use Taxes are Sales Taxes when you purchase something upon which you would have been charged Sales Taxes if you had gone into a store in Michigan and they charged you Sales Taxes.  In other words, just because someone doesn’t collect Sales Tax from you doesn’t mean you don’t owe it anyway in the form of Use Tax.

The Rules Are Complex

The rules, especially for certain business activities, are much more complex than these general guidelines and I am ready to help you!  Here are some examples of when Use Taxes apply or not:

  • You purchased clothing from Amazon.com and they don’t charge you Sales Tax. If you had purchased the clothing in a store in Michigan, they would have charged you Sales Tax.  In this case you owe Use Tax to Michigan.
  • You purchased a Dell computer online or over the phone and they charge you Michigan Sales Tax. In this case, you have already paid Sales Tax so you don’t owe Michigan Use Tax.
  • You purchase prescription medications from an online supplier and they don’t charge you Sales Tax. In Michigan, prescription medications are not subject to Sales Tax so you would also not be subject to Use Tax.
  • You purchase a riding tractor from your neighbor and they didn’t add Sales Tax to the price. A riding tractor is not exempt from Michigan Sales Tax so you would have to report the purchase on your Michigan Tax Return (whether business or personal) and pay Use Tax.
  • You went to Chicago, purchased a golf bag and they charged you Chicago and Illinois Sales Tax (which together are more than in Michigan). In this case, since you made the purchase when physically present in Chicago and they charged you Sales Taxes, you don’t owe Michigan Use Tax (or Sales Tax, either).

Of course, there are always exceptions to exceptions and you should ask if you are not certain. 

QuickBooks Users:  QuickBooks does not have a built-in function for Use Tax, however there is a very simple work-around to help you track and pay this.  Please call me for help!

IRS Says Be Alert for Tax Scams

My best advice to avoid tax scammers.

To avoid tax scammers, the best advice I can give you is to provide NO information over the telephone UNTIL you have received a printed document in the mail from the IRS. This is the first step taken by the IRS to alert you to an inquiry related to your tax return.

Please contact me if you believe you are being scammed by someone—I have a variety of resources to help you.

Below is a complete reprint of an article related to tax scamming operators, as provided by the IRS.

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Tax scammers work year-round; they don’t take the summer off. The IRS urges you to stay vigilant against calls from scammers impersonating the IRS. Here are several tips from the IRS to help you avoid being a victim:

  • Scams use scare tactics. These aggressive and sophisticated scammers try to scare people into making an immediate payment. They make threats, often threaten arrest or deportation, or they say they’ll take away your driver’s or professional license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls.” Emails will often contain a fake IRS document with a phone number or an email address for you to reply.
  • Scams spoof caller ID. Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.
  • Scams use phishing email and regular mail. Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. This makes the scheme look official.
  • Scams cost victims over $38 million. The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of more than one million contacts since October 2013. TIGTA is also aware of more than 6,700 victims who have collectively reported over $38 million in financial losses as a result of tax scams.

The real IRS will not:

  • The IRS will not call you about your tax bill without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card or any specific type of tender.
  • Ask for credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.
  • Threaten you with a lawsuit.

If you don’t owe taxes or have no reason to think that you do:

  • Do not provide any information to the caller. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

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Please contact me if you believe you are being scammed by someone—I have a variety of resources to help you.