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.
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!