The state government sometimes collects use tax directly from an out-of-state merchant, but because there are so many retailers, and the list of taxable goods changes so often, the government (at least in California) leaves it up to the individual consumer to pay the taxes he owes. Starting in 2004, they also provided a handy line on Form 540 so people could include it with their annual income tax returns. How nice and convenient.
I'm pretty sure almost nobody in California actually pays the correct use tax as required by this crazy law, and those who pay anything at all only do it out of fear that the law will actually be enforced someday and they'll be slapped with a penalty.
I quote from the California State Board of Equalization's Use Tax FAQ:
Is the California use tax new?
No. The California use tax law became effective on July 1, 1935. [my emphasis -CKL] Section 6201 of the Revenue and Taxation Code established the use tax to eliminate the price disadvantage of California businesses when California consumers purchase taxable merchandise from out-of-state retailers. [gee, protectionist much? -CKL]
Legislation was passed in 2003 allowing a use tax line to be added to California's income tax returns. This change makes it easier for consumers to report and pay use tax on their purchases. Several other states allow taxpayers to report use tax on their state income tax returns.
Let me break that down for you: if California wanted to go to the trouble, they could prosecute virtually every taxpayer in the state for use tax evasion over the last sixty years. And the penalty includes interest on any use tax you didn't pay in the past.
This was a bad idea in 1935, and it's an even worse idea now, with the proliferation of mail-order retailers, not to mention tourism. Do you really expect people to analyze every single one of their purchases made on an out-of-state business trip, on vacation, or on the Web, to determine whether those items incur use tax in their home state, and if so, calculate and pay that? Are you high?
I wouldn't want to be the test case for this, but the argument against this law seems obvious: by shifting the bookkeeping burden to individual taxpayers, the state government is basically admitting that it's an unreasonable amount of work to keep track of these taxes. And even if the state did decide to go after someone, how is the prosecution going to calculate the amount owed? That's right: they're going to guess.
I feel sorry for any accountant who's actually had to sift through his client's receipts for an entire year to determine the use tax for out-of-state purchases. If anyone should lobby for getting rid of this ill-conceived gouge, it's them.
Fortunately, there are some things exempt from California use taxes:
SPACE FLIGHT PROPERTY - The sale or use of specified qualified property for use in space flight, including an orbital space facility, space propulsion system, space vehicle, satellite, or space station of any kind, or any property which is placed or used aboard any such system, including fuel adapted and used exclusively for space flight is exempt from sales and use tax.
Yeah, I'm sure Billy Bob Thornton is real happy about that.