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An article on businessweek got my attention today. From the headline:

A Texas software vendor we have purchased from for years got audited by the California State Board of Equalization because they never billed for use tax. After the audit, they sent us a past-due use-tax bill, which we paid right away.

This raises some red flags in my head. The main question is: who is responsible for collecting a Use tax for a customer in another state? I always assumed Use Taxes were always calculated and paid by the customer directly to their own state.

In this particular situation, I'm pretty sure that the vendor must have some operating presence in California to be audited in the first place. However, wouldn't that make it a sales tax? And in the case of being retroactive, should a company be collecting and paying taxes for their out-of-state clients on the off chance that they ever open an office in another state?

For me, this is theoretical since I'm not selling software yet. But I plan to do so in the not too distant future, and that plan will likely include being incorporated as an LLC, in case that makes any difference.

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A purchaser pays use tax for goods purchased out of state and the seller has no obligations. Wikipedia has a good explanation:

For example, a resident of Massachusetts, with a 6.25% "sales and use tax" on certain goods and services, purchases non-exempt goods or services in New Hampshire for use, storage or other consumption in Massachusetts. Under New Hampshire law, the New Hampshire vendor collects no sales taxes on the goods but the purchaser/user must still pay 6.25% of the sales price directly to the Department of Revenue in Massachusetts as a use tax.

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That was my understanding as well, which is why the linked article confused me by describing the vendor collecting a use-tax. I think the simplest answer here is that the author of the article doesn't understand the difference between a sales and use tax. – BMitch Jun 28 '11 at 2:45
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Use tax is one of the more confusing things, IMO...

At least in Michigan, the rule is that you pay use tax on out-of-state purchases, unless you paid that state's sales tax and that state has a reciprocal use tax agreement with Michigan...

But in Michigan, it is reported personally, as the buyer's responsibility. MI is one of many states that uses an estimated use tax table to encourage voluntary reporting.

Michigan's stand is currently rather laid-back. California is taking a much more aggressive stance (perhaps due to their budget shortfall?). They have brought some online retailers to court successfully for not collecting CA use tax (e.g., Borders, headquartered in MI, has to collect CA use tax in their online store for CA residents just because the company has physical stores in CA).

Some states have interstate use tax agreements that allow interstate auditing. e.g., Connecticut and New York may exchange tax audit records for interstate businesses, and then send a tax bill (to the buyer) for the use tax owed.

Currently, use tax is a confusing subject. However, as online commerce increases and state income becomes more of a priority, I expect that a simplified sales/use tax system will become common in the next decade (there are a few bills to that effect in Congress now, but they've all been stalled).

As to your question in particular, there are legal precedents requiring a physical presence (a "nexus") in the state for the state to require the seller to collect sales tax.

So, currently, (assuming you don't open a storefront in CA) you don't have to worry about it. I'll say again, though, that this may change in the next few years; Amazon and the like do a lot of sales, the buyers aren't reporting all their sales, and the states are well aware of that. So (IMO) the likelihood of a future Internet commerce tax is high.

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