As many people do their holiday gift shopping online, the Indiana Department of Revenue is reminding residents they must pay a use tax.
Since many out-of-state online retailers do not collect Indiana sales tax, Hoosier buyers need to pay a use tax to the state on their income tax returns next spring.
“Essentially, it’s a sales tax you pay after a purchase,” Stephanie McFarland, director of public relations for the department, said. “It’s something that originally applied to catalog sales. But as commerce has evolved, it applies to online sales as well.”
Last year, more than 24,000 Hoosiers paid use tax, accounting for about $1.4 million. But 3.1 million people file individual income tax returns each year in Indiana.
“It would seem logical that a lot of those people are doing online purchasing,” McFarland said. “And the chances are probably pretty great that they are making purchases from vendors that don’t charge sales tax.”
While businesses that sell products online and have a physical presence in Indiana must collect the state’s sales tax, federal law does not require online retailers to collect sales tax for states other than their own.
“The hard part is you’re relying on folks to first know the law, then pay the tax like they should,” McFarland said. “We’re trying to educate people about it.”
Even if a person is charged sales tax for another state, if that item purchased is brought to Indiana and stays here, the resident will owe the difference in sales tax if he didn’t pay at least 7 percent. This applies to both online and in-store purchases. All states except for Indiana, Tennessee, California, Mississippi, New Jersey and Rhode Island have a sales tax less than 7 percent.
“If you go to another state and you pay 5 percent sales tax, then you do need to pay another 2 percent in Indiana” through the use tax, McFarland said.
Estimates of what the state may be losing from residents who don’t pay use tax range from $150 million to $300 million.
“The estimates are all over the map,” McFarland said.
Income and sales taxes combined make up more than 75 percent of the state’s budget, she said. Sales tax funds are used to pay for things like education, teachers’ pensions and Medicaid.
Residents who don’t pay their use tax could be discovered through an audit and are subject to paying penalties and interest.
“We do conduct randomly selected audits,” McFarland said.
Patricia Dodson, a certified public accountant in Jasper who prepares tax returns, said the vast majority of her clients are unaware of the use tax requirement.
“I would say 99 percent don’t know about it,” she said. “I think a lot of them believe that because they are buying online, that there is no sales tax due, period.”
The best way to figure the tax is to save receipts, Dodson said. If no sales tax is charged, use tax is calculated by multiplying the total by .07.
If a resident previously was unaware of the use tax and therefore did not save receipts, there are other ways of figuring how much is owed.
“They could go back through their credit card statements and try to reconstruct what they have spent,” Dodson said. She also said a customer may contact the vendor to determine if sales tax was charged.
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