Does New Jersey Charge Sales Tax on Out-of-State Purchases? Unraveling the Nuances

Yes, New Jersey can charge sales tax on out-of-state purchases. This isn’t a simple yes-or-no answer, though. The key lies in understanding the concepts of use tax and nexus, and how New Jersey’s tax laws interact with them. Let’s delve into the details.

Understanding the Interplay of Sales Tax, Use Tax, and Nexus

Sales tax is a tax levied on the sale of tangible personal property and certain services within a state. When you buy something in a New Jersey store, you pay sales tax. However, what happens when you buy something online from a retailer located in another state and have it shipped to your New Jersey address? That’s where use tax comes into play.

Use Tax: The Complement to Sales Tax

Use tax is essentially the mirror image of sales tax. It’s designed to capture the tax revenue on purchases where sales tax wasn’t collected at the point of sale. Think of it as a “backup” system ensuring that the state receives its due revenue on goods and services used, stored, or consumed within its borders, regardless of where they were purchased.

New Jersey residents are required to pay use tax on out-of-state purchases if they would have been subject to sales tax had they been purchased in New Jersey, and sales tax was not collected by the seller. The use tax rate is the same as the New Jersey sales tax rate (currently 6.625%, although certain Urban Enterprise Zones have a slightly lower rate).

Nexus: The Determining Factor

So, why doesn’t everyone automatically pay use tax on every out-of-state purchase? This is where nexus becomes critical. Nexus refers to the level of connection a business has with a state. If a business has nexus in New Jersey, it’s legally obligated to collect New Jersey sales tax on sales to New Jersey residents, even if the business itself is physically located elsewhere.

Nexus can be established in various ways, including:

• Having a physical presence in New Jersey (e.g., a store, office, warehouse).
• Having employees or agents in New Jersey.
• Maintaining inventory in New Jersey.
• Affiliate relationships with businesses in New Jersey.
• Economic activity that meets a certain threshold, even without a physical presence (referred to as economic nexus).

The economic nexus rules are crucial in the age of e-commerce. New Jersey, like many other states, has established economic nexus thresholds. If an out-of-state seller’s sales into New Jersey exceed a certain amount (currently $100,000 in gross revenue or 200 separate transactions), the seller is required to collect New Jersey sales tax.

Therefore, when you make an online purchase, the website might charge you New Jersey sales tax if the seller has nexus in New Jersey. If they don’t charge you sales tax, you might owe use tax.

How to Pay Use Tax in New Jersey

If you make out-of-state purchases on which New Jersey sales tax was not collected, you’re responsible for paying the use tax. This is typically done when you file your New Jersey income tax return (Form NJ-1040). The tax return has a specific line for reporting and paying use tax. The Division of Taxation also provides worksheets and instructions to help you calculate the amount due. Keeping records of your out-of-state purchases will simplify this process.

FAQs About New Jersey Sales Tax and Out-of-State Purchases

Here are some frequently asked questions to further clarify New Jersey’s sales tax rules and how they apply to out-of-state purchases:

1. What is the current New Jersey sales tax rate?

The standard New Jersey sales tax rate is 6.625%. However, certain municipalities designated as Urban Enterprise Zones (UEZ) may have a slightly reduced rate, currently at 3.3125%.

2. Are there any items exempt from sales tax in New Jersey?

Yes, New Jersey has several sales tax exemptions. These include:

• Most food items for home consumption (excluding prepared food).
• Clothing and footwear (with certain exceptions).
• Prescription drugs and medical equipment.
• Newspapers and periodicals.

These exemptions also apply to use tax, so if an item is exempt from sales tax in New Jersey, it’s also exempt from use tax even if purchased out-of-state.

3. What happens if I overpay sales tax to an out-of-state retailer?

If you believe you were incorrectly charged sales tax by an out-of-state retailer (for example, if the retailer didn’t have nexus in New Jersey), you should contact the retailer directly to request a refund. New Jersey cannot directly refund sales tax collected by another state.

4. Do I need to keep records of all my out-of-state purchases for use tax purposes?

While it’s not strictly required, keeping records of your out-of-state purchases is highly recommended. This will make it much easier to accurately calculate and report your use tax liability when you file your New Jersey income tax return. Receipts, invoices, and online order confirmations are all good documentation.

5. What if I purchase something online from a seller that collects sales tax for another state, but not New Jersey?

You will not owe use tax to New Jersey. If the seller collected sales tax, even if it was for a different state, you are not obligated to pay use tax. You might, however, want to confirm with the seller or the other state if you can get a refund if the tax collection was wrong.

6. Are services subject to use tax in New Jersey?

Yes, certain services are subject to sales tax (and therefore use tax) in New Jersey. Examples include certain telecommunication services, cable television services, and landscaping services. The specific services subject to tax are defined by New Jersey law.

7. How does use tax apply to businesses?

Businesses are also subject to use tax on out-of-state purchases of taxable goods and services used in their New Jersey operations, if sales tax was not collected at the time of purchase. Businesses typically report and pay use tax on their sales tax returns.

8. What are the penalties for not paying use tax in New Jersey?

Failure to pay use tax can result in penalties and interest charges. The penalties vary depending on the amount of tax owed and the length of the delinquency. It’s always best to accurately report and pay your use tax liability to avoid these issues.

9. Does New Jersey have a “small purchase” exception for use tax?

New Jersey does not have a specific “small purchase” exception that completely eliminates the use tax obligation for small-dollar out-of-state purchases. All taxable purchases, regardless of the amount, are technically subject to use tax if sales tax wasn’t collected. However, as a practical matter, the Division of Taxation primarily focuses on ensuring compliance for larger purchases and encourages honest reporting of all taxable transactions.

10. I moved to New Jersey from another state. Do I owe use tax on items I brought with me?

Generally, you do not owe use tax on personal property you owned and used in another state before moving to New Jersey. The use tax is primarily intended for purchases where the goods were acquired for use in New Jersey.

11. What if I purchase an item out-of-state and then give it as a gift to someone in New Jersey?

If the item is taxable in New Jersey and sales tax wasn’t collected when you purchased it, you, as the purchaser, are technically responsible for paying the use tax. However, the Division of Taxation is unlikely to pursue use tax on small, occasional gifts.

12. Where can I find more information about New Jersey sales tax and use tax?

The New Jersey Division of Taxation website (nj.gov/taxation) is the best resource for detailed information on sales tax and use tax. You can find publications, regulations, and FAQs on their website. You can also contact the Division of Taxation directly with any specific questions.

Understanding New Jersey’s sales and use tax laws can be complex, especially with the rise of e-commerce. By understanding the concepts of nexus and use tax, you can ensure that you’re complying with New Jersey’s tax regulations and avoid potential penalties.