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Wednesday, February 23, 2011

Guide to sales and use taxes

The difference between sales tax and use tax is that sales tax is charged at the time of sale whereas use tax is levied retroactively some time after the selling of a product. If purchases comprise a large part of personal income spent, sales and/or use tax could add an extra 5-7.3% to the total bill. This article will describe sales and use tax and provide examples of each and will then offer tips for saving and/or avoiding sales taxation.

Sales tax

Sales tax varies from State to State and some localities may charge additional taxes to raise money for municipal projects. Sales tax is also higher for some products than others. For example, several States have high sales taxes on cigarettes and beer. New Jersey and Rhode Island have the highest tax on cigarettes and $2.58 and $2.46 per pack respectively. California and New Jersey are among the highest taxed States in terms of Sales at 7.3% and 7% however some States with seemingly average sales tax rates such as Virginia also charge a 2% tax on food.

0% Sales tax states do exist, however the price of goods may be higher especially in those sales tax free States such as Delaware and New Hampshire, which are charged tax by the government on gross receipts prior to transactions at the retail level. (moneycentral.com) A list of the sales tax free states is below in addition to Colorado which has the lowest sales tax of the States that charge sales tax.

• Oregon
• Alaska
• Montana
• New Hampshire (Subject to pre-retail tax)
• Delaware (Subject to pre-retail tax)
• Colorado 2.9%

Use tax

Use tax is a type of tax administered by States when taxes that should have been paid by residents of that State are somehow avoided. (nolo.com) In some instances such as purchase of large equipment that needs to be registered and/or licensed, use tax can be levied fairly easily. However, in the case of voluntary use tax disclosure on items purchased out of State, the collection and reporting of the use tax becomes more haphazard. (wikipedia.com)

When use tax does apply to purchase made out of State, that use tax may be avoided by keeping the purchase item out of state in addition to registering the item out of State. In other words, for the use tax to not apply, the storage and registration of large equipment subject to use tax must be in the State in which no sales tax was originally charged. (oatax.com)

How to avoid sales tax

There are actually a few ways to not pay sales tax. Some of these methods may still be subject to tax if they are sold in a business context and if State and Federal taxation rules apply. However, there are ways to obtain products for free and/or minimize sales tax costs, some of which are listed below. Moreover, the following list illustrates that sales tax isn't absolute and usually applies to the most convenient method of sale which quite often is retail sales through licensed businesses with physical addresses at which transactions take place.

Deduct sales tax on IRS Schedule A
• Barter through barter exchange networks
• Buy used through non-taxable venues
• Purchase through the Internet
• Attend private sales
• Take advantage of tax-free days and select sales tax only states
• Shop in sales tax free States
• Shop across State lines with lower taxes
• Have purchased products shipped to an out of state or international address

The more products that are purchased, and the higher the price of the item, the greater the incentive may be to consider options to sales taxation. When sales tax is successfully avoided by utilizing sales tax minimization techniques, a use tax may apply and be required by law. However, this is not always the case as with barter, residence within a sales tax free state, tax holidays etc.

In some cases, a municipal or county sales tax may also be assessed and added to the State sales tax rate if any. In such instances one will either discover this additional tax on a sales tax or through inquiry to the county or other source. In the case of large purchase for which a large amount of tax has been paid and when an individual or household itemizes income deductions, sales tax may be deductible.


1. http://www.nolo.com/definition.cfm/Term/B3E6B054-CBDF-408E-9E607EA598A19240/alpha/U/
2. http://articles.moneycentral.msn.com/Taxes/Advice/TheBestAndWorstStatesForTaxes.aspx?page=2
3. http://moneysmartlife.com/how-to-avoid-paying-sales-tax/
4. http://www.ehow.com/how_2080714_shop-online-avoid-sales-tax.html
5. http://en.wikipedia.org/wiki/Use_tax
6. http://www.oatax.com/ar1112006.htm