Tax-free shopping

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Tax-free shopping refers to a type of marketing promotion wherein customers with access from a sales taxed jurisdiction are enticed to make "tax free" purchases, notwithstanding the legal requirement to pay the equivalent (compensatory) use tax when they return home. For example, merchants "in tax-free New Hampshire" regularly attempt to entice residents of adjacent Massachusetts, Vermont and Maine to come purchase goods, but fail to point out that there is no general exemption from the "sales and use" taxes when the goods are taken back home. Many purchasers conveniently "forget" to pay the tax, possibly because they feel it is the duty of a merchant to collect it from them and pay it indirectly, rather than paying it directly to the state themselves.

Similarly, any non-exempt resident of a US state with a sales tax is also liable for payment of the equivalent use tax when purchasing goods from another state (or country) through mail-order, by telephone or through the Internet.

This issue should not be confused with so-called "Internet taxes", which only refer to taxation of the internet services themselves (websites, email, access, etc). This is separate from taxing purchases of goods using the services.

Goods that would be taxable at home are taxable at the same rate when taken home or delivered, regardless of where or how they were purchased. Numerous local sales tax (use tax) exemptions exist according to taxpayer status (e.g., for charitable organizations), size of purchase (e.g., clothing under $110 in Vermont) and for specific types of goods (e.g., protective clothing, food, medication, educational materials, etc).

Shoppers should also be aware of this phenomenon when purchasing in adjacent states that have a slightly lower tax rate than at home, as they may be personally liable for paying the difference when they return home with the goods, although it was already not "tax free", but rather "tax discount".

Another common oversight by commercial taxpayers is the limited use tax exemption for business stock, which applies for goods purchased tax-free for resale, but lapses if the goods are converted to use by the company itself (e.g., company car, office and cleaning supplies).

Some countries charge a value added tax (VAT) or goods and services tax (GST) on purchases. When those customers are residents of a US state having sales taxes on such goods, those taxes paid can be used as a credit against the amount of use tax otherwise owed. However, some travellers make the mistake of claiming a post-travel refund of the VAT or GST, without consideration of the ongoing tax liability to his or her state.

While it is true that many residents of states with sales taxes are unaware of the equivalent use taxes, there are potentially severe penalties for willful tax evasion. Where an online, mail-order, or travelling shopper intentionally makes "tax free" purchases for the purpose of evading state sales taxes, one could well argue that a crime has been committed. There may be fees, penalties and interest accrued for failure to timely remit the necessary tax return and tax payments. It should also be noted that the statute of limitations on taxes due may not begin to run until and unless a required tax return is filed.

Under a "streamlined" interstate use tax agreement, many states have enacted (or are considering) statutory changes that require residents to disclose, under penalty of perjury, their annual use tax liability for out-of-state purchases.

There have been some national efforts to create obligations or incentives merchants to collect taxes from customers who are residents of sales tax states, especially online sales, in exchange for a percentage of the taxes that would be otherwise unpaid. There is also a growing group of "tax amnesty" states, which may permit residents to settle unpaid use taxes (and penalties) at a discount, but only before being caught.