Sales Tax Vs. Use Tax: Buying Drums Across State Lines
We’ve all seen the advertisements in the past — you know the ones I’m talking about. You order something from a magazine ad or a television commercial and it states, “Six-percent sales tax applies to Michigan residents” (or any one of the other 49 states). Why is this? Why can a guy in New York City buy a snare drum from a store in Michigan for $500 out the door, but a resident of Detroit would have to pay $30 in sales tax for the same drum? The reason is more grandiose than you would probably expect. It has to do with the United States Constitution.
The U.S. Constitution contains the Interstate Commerce Clause, which limits the right to pass law affecting interstate commerce to Congress. In plain terms, this means that only Congress can pass laws pertaining to the purchase or sale of goods across state lines. Now, by implication of this constitutional rule, there is also something referred to as the “Dormant Commerce Clause.” This states that if only Congress can regulate interstate transactions, then individual states cannot. In other words, a state can’t pass legislation that improperly burdens or discriminates against interstate commerce.
That brings us to sales tax. A sales tax is established by each individual state, and is only applicable to transactions that occur wholly within that state’s borders. So if you are in Texas and you go to a 7-11 to buy a Coke, you pay Texas sales tax. The exchange of money and product all occurred within the Texas borders. But the state government in Texas couldn’t pass a law taxing a transaction if any part of that transaction took place in another state.
So practically speaking, what does this mean? Let’s go back to the original example of the guy from New York buying a snare drum from a dealer in Michigan. This transaction cannot be subject to sales tax because the transaction takes place equally in New York and Michigan. According to constitutional law, neither state is permitted to tax this transaction.
Now, it would be nice if everything was so cut and dried, but it isn’t. States don’t like losing revenue from sales because their residents are shopping outside their borders, so now there is a thing call a “use tax.” If you buy a product through an interstate transaction without paying sales tax on it, and then proceed to use that item in your home state, you are expected to pay a use tax on that item — and guess what? The use tax is usually the exact same amount of taxes that you would have paid in sales tax.
Now if you purchase an automobile across state lines, the state will learn about the transaction because the car has to be registered with the state. Therefore the state will get its use tax. But with most purchases, you are essentially on the honor system to report the taxes on the purchase (unless the state questions you). As an attorney, I’ll never advise anyone to ignore the laws, but have you ever known anyone who has reported something like this?