Department of Revenue
Use Tax / Nov. 2011
What is Use Tax?
• Tax on tangible personal property, services and products
transferred electronically when no sales tax (or not enough
sales tax) was paid. Use tax rate is the same as sales tax
• A tax is hereby imposed on the privilege of the use,
storage, or consumption in this state of tangible personal
property, services, and products transferred electronically at
the same rate imposed on sales tax. (Effective 1939)
• Why didn’t the retailer change me sales tax?
• The Federal Interstate Commerce Clause does not require
a retailer located outside South Dakota to comply with our
tax laws unless the retailer has a physical presence
(nexus) in SD.
• Most Internet companies do not have a physical presence
in South Dakota.
Majority of the Audit Assessments are
Use Tax applies where the customer uses,
stores or consumes the goods or services.
When sales tax is not properly charged, use tax applies.
Retailer pays Sales tax - Purchaser pays Use tax.
Same rate as the state and municipal sales tax.
Applies to purchase price-including freight or delivery charges.
Example: You purchase a book online for $15 + $2 shipping.
Use tax is due on $17.
If product or service purchased is exempt from sales tax, it is also
exempt from use tax.
Use tax is normally incurred when:
Items are taken from inventory for business or personal use.
Items are purchased without sales tax such as purchases from out-
of-state suppliers, Internet or mail order companies.
Services are purchased without sales tax.
Rental receipts on equipment brought in from another state.
Construction materials removed from inventory for use in another
The purchase of promotional items.
Service providers purchase of items used to provide the service.
Use tax is normally incurred when:
State sales tax was paid, but not municipal tax and the goods are
used, stored or consumed in a municipality.
– Example: A construction company purchased construction equipment and had
it delivered to their company location outside city limits. 4% state sales tax was
charged by the seller.
– Company later brought the equipment into city limits to use on a project. The
city had a 2% municipal tax.
– Once it is used inside city limits the additional municipal tax is due.
– This company forgot to pay the additional municipal tax. Revenue assessed
the company over $60,000 in municipal use tax.
Top 10 Errors found
in SD Tax Audits
1. Under-reporting of sales, use and/or excise tax due to
poor record keeping
2. Not remitting use tax on goods and services purchased
exempt from tax and used.
3. Not remitting use tax on items taken from inventory and
given away free of charge.
4. Not remitting use tax on items taken from inventory for
business or personal use.
5. Contractor not remitting use and/or excise tax on Owner
Furnished Materials (OFM).
Top 10 Errors found
in SD Tax Audits
6. Contractor not remitting use tax on building materials
taken from inventory and used on a construction project
in-state or out-of-state.
7. Not remitting use tax on equipment brought in from out-
8. Exempting sales to taxable customers such as churches
9. Not having valid exemption certificates on file.
10. Municipal Tax reporting errors.
7 Year Rule
Use Tax due if:
• A product, not originally purchased for use in SD, is brought
into SD for use, storage or consumption;
• That product is less than 7 years old; and
• An equivalent or greater amount of sales or use tax was not
Age is determined by the manufacturer date, if unknown use the purchase date.
All items purchased for use in SD are subject to sales or use tax.
Example: A business in Minnesota relocates to SD. They transferred equipment
from the MN plant to SD. If that equipment is less than 7 years old, use tax is due
on the fair market value at the time it is brought into SD. (Provided an equivalent
amount of tax was not paid to MN.)
Statute of Limitations
3 years from the date the return reporting the
tax is filed or due - whichever is earlier.
Only assess on transactions within 3 years from
Notice of Intent to Audit.
No limitations when:
– Fails to file a return
– Files a fraudulent return
– Fails to remit tax for a return that was filed
Banks and Insurance Companies
Use Tax Exemptions
Banks – taxed under SDCL 10-43-5 (bank franchise tax)
Insurance Companies – taxed under SDCL 10-44-8
(insurance premiums tax)
No USE TAX on services!
But SALES TAX is due!
Does a retailer owe use tax when they take items out of
untaxed inventory to donate or use?
Example: Clothing store owner takes an item of clothing from
inventory for their use. Store paid $75 to wholesaler for item, but
item retails in store for $150.
Use tax is due by owner on the store’s cost of that item,
therefore use tax is due on $75.
If you charge for your service, then donate the
proceeds to an exempt organization, the charge is
subject to sales tax.
• Used for demonstration only – no use tax, but sales tax
is due when it is sold
• Used by the business – use tax due, and if the item is
later sold sales tax is due
• Samples of untaxed inventory are
subject to use tax.
Use Tax due by Service Providers
Service providers: supplies used or consumed in
providing their service are taxable.
• Service Providers are the user or
consumer of all TPP and services they
Allowing credit for sales or use tax legally paid to another state on products
or services towards the amount of use tax due in this state.
Credit is allowed for sales or use tax legally due and paid to another state
against the sales or use tax due SD if the other state provides for like
Example: Backhoe purchased and picked up in Bozeman, Montana. No
sales tax was paid to the retailer as Montana does not have a sales tax.
Backhoe is then brought to Spearfish, SD for use in construction business.
Use tax due SD: 6% (State 4% + Spearfish 2%)
Tax paid MT: 0
Use Tax due SD: 6%
Example: Computer purchased at a store in Iowa. 5% sales tax
paid to the retailer at time of purchase. Customer picked up
computer in Iowa and brought it to Sioux Falls to use in an office.
Use tax due SD: 6% (State 4% + S Falls 2%)
Less tax paid IA: 5% (credit)
Balance due SD: 1%
Example: Tax NOT legally paid: Aberdeen customer purchased
electronics online from company in Texas. Retailer charged 5%
Texas sales tax, and shipped the goods to Aberdeen. Sales tax is
due where customer receives the goods. SD tax legally due, not
Use tax due SD: 6% (State 4% + Aberdeen 2%)
Tax paid TX: 5% (but will not give credit)
Balance due SD: 6%
Ask TX retailer to refund the erroneously charged TX tax.
Examples of items subject to sales or use tax:
Complimentary drinks & food (state and city use tax due,
but no 1% MGR use tax on food & drink)
Free promotional items Kitchen equipment - stoves,
Linens warmers, pots, pans, food
and beverage dispensing
Dishes or glassware
Containers that hold take-
out food – OK to purchase
Examples of items subject to sales or use
Software (anti-virus etc.)
Envelopes and paper
Subscriptions to websites
Examples of items subject to sales
or use tax:
Paint – OK for resale
These items are being used by the seller. The seller cannot purchase them for resale.
Even if the body shop charges for the sand paper etc., it still subject to sales or
use tax when purchased by the body shop.
Examples subject to sales or
Owner Furnished Materials
Services (engineering etc.)
By statute contractors subject to contractors’ excise tax are the users
and consumers of all materials used in a project. Contractors owe
tax on all materials used by them even if given to them by an exempt entity
like a government agency.
Examples of services subject to
sales or use tax:
Online Software Help Service
When hiring an unlicensed service provider use tax is due where the
client uses the service.
Example: An out-of-state accounting service is hired to complete tax
returns for a store in Beresford. SD state and Beresford city use tax is
due because the service is used by the store in Beresford.
– Tax Facts
• Municipal Tax Information Bulletin
– City tax rates
– Tribal Information
– Vending/amusement/lottery chart
Visit our Website (Business Tax)
Toll Free Number: 1-800-829-9188
Visit our Geographic Information Systems (GIS)
Email the Business Tax Division
Check out our Quest Program (E-file)