Tax implications for NC residents making "out of state" purchases (FYI)

I thought I would post this information that may be duplicated in other threads scattered throughout the forum, but I think it is helpful for people that live in NC to understand the tax implications for making out of state purchases and especially on ATV's and UTV's. I got hit with this myself and a few others know people as well, so this is first hand information.

The bottom line is, when you buy an item out of state, you must pay the equivalent of whatever the NC sales tax is in one of two ways. 1, pay the dealer when you buy the items or 2, pay the tax on your purchase when you file the taxes at the end of the year in the "use tax" section. The is the link to the NC Dept of Rev that covers the details and I'll walk you through a couple of scenarios:

http://www.dornc.com/taxes/sales/use.html

For this example, let's pretend you bought a new RZR in SC to save $400 on the purchase price and avoid paying 8% in sales tax on a $12,000 purchase price. So in essence, you drove to SC, picked up the RZR for $12,000 but didn't pay the $960 in taxes. In total, you got a great deal saving $960 in taxes plus got a better price saving an additional $400 for a total of $1,360. Not too shabby. Time goes by, let's say 4 years later. By now, you have sold that RZR and have something different or nothing at all. Next thing you know, you get a letter in the mail from the NC Dept of Revenue claiming that they have knowledge of your purchase of an ATV in SC (Date and Dealership information included) with the MSRP (not the discounted price) listed. The letter politely demands that you have 30 days to produce documentation that proves that you paid tax (either SC or NC) on the vehicle or you will be billed the following:

Original MSRP Tax Amount (Let's say MSRP was $13,990 @ 8%) = $1,119.20
Interest fee SINCE the purchase date = est. $667
Penalty Fee = $560.

So, unless you produce proof of your tax payment on your purchase to SC within 30 days, you will be getting a tax bill for $2,346.20 and your chances of a NC tax return audit just went up as well.

What if you paid the 8% SC tax? Will NC still expect me to pay the NC tax of 8%? Short answer is NO. If you have a sales invoice showing that the dealership, or store/whatever, charged you 8% and you paid the $960 on the NEGOTIATED price of $12,000, you simply send a copy of that back to NCDOR and you will then get a letter a few weeks later saying the case has been dismissed.

What if I paid a 6% SC sales tax? So you have an invoice that shows that you paid SC 6% on the $12,000 negotiated sales price of $720. Not a perfect scenario because you aren't completely out of the woods, but the number change quite a bit. NC will still expect the 2% difference to meet their sales tax of 8%, so they "credit" you back the amount you paid against their original claim, which reduces the interest and penalty quite a bit AND you have at least proven that you didn't pay MSRP. Your new tax bill would look something more like this instead:

2% of $12,000 in taxes = $240
Interest = $150
Penalty = $130

So, your adjusted tax bill would be $520, so you are only really in the hole by $120 if you factor in that you saved $400 when you drove to SC to get the RZR. You are also still more likely to get audited on your taxes as well.

What happens if I don't have the paperwork any more because I sold it and threw it out. That's a tough one. NC has SEVEN years to collect, so you'd better hang onto the records for at least 7 years whether you still have it or not. This is sort of a "your guilty unless proven innocent" situation unfortunately. If you can't provide the proof, you will get the bill above for the MSRP no tax payment situation. "Maybe" the out of state dealership still has records and is willing to help you out? Keep in mind though that they only made $100 off of you 4 years ago and they have people standing in their showroom right now wanting their attention. Also, keep in mind, there is no record retention policy for a dealership to have to keep your purchase information, so they can just tell you they don't have the records.

What if the deal is too good out of state, but I still want to pay the 8% taxes to make sure I cover myself in NC? You can still do the deal, just make sure at the end of they year, when you file your taxes, you list the purchase on your tax return in the "use tax" section. It will reduce your refund or increase the amount you owe by the tax amount that you would have paid had you bought the unit in NC. I can only assume that the DOR will cross reference your income tax return to see if you listed teh purchase on your income tax for that year before they send out the letter.

How is NC doing this? Easy. They are cross referencing information supplied by the manufacturer once your vehicle's factory warranty is registered to NC residents that purchased out of state. The manufacturer's want to make sure that competition is even and a dealership that doesn't charge taxes is really putting the customer at risk, and usually not up on the tax laws to educate people from different states on the implications. They just want the quick sale and figure you will figure it out later.

Why? Sort of obvious, but since they don't dual charge NC taxes, I'm guessing they are looking for tax evasion mostly. People that aren't paying any taxes or what NC charges. They want you to buy in NC so the taxes stay in NC. With the current budget shortfalls, they are getting more aggressive with where to collect revenue.

Just ATV/UTV's? Nope, there is an active lawsuit right now where the NCDOR is demanding that Amazon.com either hand over 7 years of detailed purchase history from NC residents or start charging NC State Taxes to all purchases by NC shipping addresses. Since Amazon's edge on pricing usually includes the tax savings, they are fighting this. The ACLU has also stepped in because this would provide very personal purchase information that some consider unconstitutional since the titles of books, DVD's, music and other purchases would be listed. So, a $1,000 tv purchased from Amazon.com back in 2005, assuming you didn't list it on your tax return like if you had bought an ATV out of state, is subject to the same fees and fines from NCDOR. Here is a link to this story:

http://www.wral.com/news/local/politics/story/7450980/

There is a comment about them not wanting to collect back taxes, but why would the NCDOR being requesting the information.

In summary, the situations that we all get ourselves into is really based on your own decisions. Personally, as a newer resident to NC, I wasn't aware of this concept of "use tax." We didn't have this in Michigan. We also didn't have car inspections and highway use tax bills every year on the value of each vehicle. However, our annual license plate renewals were a heck of a lot more than in NC and so were our property taxes. Every state has their own way of collecting money and they are all getting more and more desperate to not only enforce the laws on the books, but find new ways as well. I'm hoping this thread is found useful for those people that didn't know about this because I don't want anyone to get that surprise letter in the mail.

Good information, it probably works the same way here in Virginia, the state always wants their part of the tax revenue.

Pops wrote:

Good information, it probably works the same way here in Virginia, the state always wants their part of the tax revenue.

thanks

that must be why people pay in cash so they wont get hit.

They walk in and say their name is BUBBA WUBBA and they like to pay in cash.

It's still tied to the registration information that you provide to the manufacturer for warranty coverage, cash or credit wouldn't matter. If you have dual residency or plan to use it at a location other than in NC, tie it to that address and hope that whatever state is that you choose isn't doing the same thing.

That very thing happened to us about a year ago. We live in NC and purchased the Rhino in Va. A couple years after the purchase came the letter from NC. There was a Va. tax paid but I think it was only 3% and we paid $10.00 to register it in Va. We ended up showing them that we had property in Va and they dropped it but for a week I was thinking I was going to have to pay them.

Chappy hell the state of NC call me by my first name because they have hit me about 5 times in the last 7 years pay the tax now or pay a whole lot later been there done that

TBONE21 wrote:

that must be why people pay in cash so they wont get hit.

They walk in and say their name is BUBBA WUBBA and they like to pay in cash.

bubba Tbone...I did not know you knew my cousin!!!!!!!!

S.C. got me 4 years after the purchase !

This thread makes me happy I buy gently used...

bubba53 wrote:

TBONE21 wrote:

that must be why people pay in cash so they wont get hit.

They walk in and say their name is BUBBA WUBBA and they like to pay in cash.

bubba Tbone...I did not know you knew my cousin!!!!!!!!

yea thats what my name when I show up and purchase with cash. Heck I will use any name.......John Doe......John Smith.......etc

Go ahead and use John Smith , Let them send him a 2000.00 tax bill !!! LOL NOT TO GOOD !

yea dad would be ticked.