When you consult on a tax type administered by 47 state level jurisdictions, and over 100 more local jurisdictions, you deal with a lot of minutia. It’s easy to miss the forest for the trees, and sometimes I forget that there are a lot of people who are unfamiliar with the very concept of a use tax. Almost everyone is familiar with sales taxes, but what the heck is a use tax? In this post, the first in a short series, I’m going to cover some very basic use tax concepts, as well as some issues specific to use tax in Illinois.
Use tax is quite simply a tax imposed on the use, storage, or consumption in the state of tangible personal property and some services. Many people are unfamiliar with use tax because it’s complementary to the sales tax. This means that if you pay the sales tax on a transaction, you don’t also owe use tax. While we generally think of all tax charged by vendors as sales tax, the fact is that sales tax is only imposed on intrastate transactions. If you walk into a brick and mortar store and buy an item from the shelf, you are charged sales tax. These days, we make a lot more of our purchases remotely through ecommerce. If those purchases are made from out of state vendors, any tax charged is actually use tax, whether we realize it or not. The two taxes work together so seamlessly that we refer to both of them as sales taxes. So why does the distinction matter?
In Illinois, the distinction is important because while the state level use tax and sales tax rates are the same (6.25%), the use tax does not include the extra layers of local taxes that can push sales tax rates well above the state rate, to over 10% in some locations. Additionally, while every Illinois vendor is required to collect sales tax on sales to Illinois purchasers, remote sellers don’t always have a responsibility to collect use tax. Until Congress decides otherwise, out of state vendors are only required to collect tax from customers in Illinois when the seller has sufficient contacts or connections with the state, which we call nexus. If it lacks such nexus, the seller won’t apply tax to your invoices, but all that does is shift the responsibility for paying the tax from the vendor to the consumer, and this responsibility is rarely fulfilled. A study by the University of Tennessee estimated that states lost between $12 billion and $24 billion annually in untaxed sales in 2012. An older Illinois study put the State’s share of lost revenue at approximately $150 million in 2010, a number which has surely grown in the last five plus years.
So how does one go about satisfying their Illinois use tax obligation? Business taxpayers can file their use tax on form ST-1, the state’s standard sales and use tax return. Individuals, however, may be surprised to learn that they too are subject to the tax, and it can be paid on their annual Illinois 1040. The State asks you to track your purchases of tangible personal property on which tax was not collected, and multiply that amount by the 6.25% use tax rate. A worksheet is provided in the instruction to the IL-1040. Since this is clearly not something that most people are in the habit of doing, the State provides a method to estimate the tax due based on the taxpayer’s adjusted gross income. The fact is that it’s rare for the state to use its limited resources to audit individual purchasers, but taxpayers should be aware of their responsibilities and act accordingly.
In a subsequent post, I will cover some of the ways that business taxpayers can get tripped up when it comes to accurately accruing for and remitting use tax, and how to avoid those pitfalls.
Other recent “Illinois (IL)” posts by William Seitz, ESQ:
- Business Use Tax in Illinois and Other States: Part 1 - The Basics
- IL Software Taxability Rules Complex - But Can Provide Refund Opportunities
- Chicago Lease Tax Amnesty Option: Deadline Approaches!
- Illinois Clarifies Tax on Shipping: You Can Save if Pick-up Option Offered
- The “411” on the “LTT”: Chicago’s Expanded Lease Transaction Tax