If pay Sales Tax on an invoice, can I still owe Use Tax?
Tax Professional Answers
Your vendor might not have charge all the sales tax that you would have paid if the item was bought locally from a seller sharing your taxing jurisdictions. Some of those jurisdictions may have an applicable Use Tax.
Secondly, if you picked up an item in another city with a lower sales tax rate or combined State and home-rule rate than your city, a rate differential or incremental use tax may be due.
As an example, Denver’s Tax Guide 90 “REDUCTION ALLOWED FOR PREVIOUSLY PAID SALES OR USE TAXES” indicates:
Denver allows a reduction of the amount of consumer’s use tax owed to it when sales or use taxes have been lawfully imposed by and paid to another municipality for the same transaction. The amount of use tax owed to Denver will also be reduced by the amount of taxes Denver is prohibited from collecting under the Constitution of the United States, federal law, or the Constitution of Colorado.
To determine any potential reduction from the Denver use tax, first determine the combined sales and use tax rate in Denver. This rate will typically be 7.65%, broken down as follows:
Next, follow a two-step calculation to determine if a use tax liability exists when taxable purchases are used, consumed, stored or distributed in Denver.
2-Step Formula to Calculate Your Denver Use Tax Liability
This two step formula calculates the proper Denver use tax under most circumstances. The footnotes at the end of this section explain other factors to consider which might affect the tax due.
Step 1: If sales/use tax has previously been paid on the taxable purchase, determine the combined total sales/use tax rate paid.2
Is this rate equal to or greater than 7.65%?
If YES, stop here because no additional use tax is due or reduction allowed.
If NO, additional use tax is likely due. Go to Step 2.
Step 2: Subtract the combined total sales/use tax paid from 7.65%.
Is this difference 3.65% or greater?
If YES, the Denver use tax liability is 3.65% of the taxable purchase price.3
If NO, the Denver use tax liability is the rate, determined in Step 2 above, multiplied by the taxable purchase price.3
Note: No refunds or credits are given for taxes previously paid in excess of 7.65%.
90 - 2 of 2
1. ABC Co., located in Denver, purchases a desk for its own use from a retailer not located in Denver who is not licensed to collect Denver taxes. The unlicensed retailer properly collects only the State- administered taxes of 4.0%. The consumer’s use tax due Denver is 3.65% (7.65% less 4.0%) of the purchase price.
2. Ace Co., headquartered in Indiana, purchased machinery for use in its operations and paid the State of Indiana sales tax of 2%. Ace transferred this machinery to its Denver operations one month later. Using the 2-step calculation, the consumer’s use tax due Denver is 3.65% of the purchase price, because the difference between 7.65% and 2% is 3.65% or greater. The Commerce Clause of the
U.S. Constitution requires that Ace Co. will pay no more tax than it would have paid by purchasing the machinery in Denver.
3. XYZ, Inc., headquartered in Los Angeles with a district office in Denver, purchases supplies and has them delivered to its home office in Los Angeles. XYZ paid California sales tax of 5%. Some of those supplies were subsequently delivered and used in its operations in Denver. The consumer’s use tax due Denver is 2.65% of the purchase price of the supplies used in Denver, because the difference between 7.65% and 5% is 2.65%. The Commerce Clause of the U.S. Constitution requires that XYZ,
Inc. will pay no more tax than it would have paid by purchasing the supplies in Denver.
NOTE: Please reference the Tax Guide as it also has important footnotes.
Please contact me for further assistance with this or other Colorado sales and use tax issues.
Sales Tax Colorado, LLC