Key takeaways
- Use tax applies when sales tax isn't collected, typically on out-of-state purchases or untaxed services used in your state.
- Unlike sales tax, use tax is self-reported and paid by the buyer, making record-keeping and awareness essential for compliance.
- Both individuals and businesses are responsible for use tax, and failure to pay can result in penalties—especially during audits.
In short: Use tax is a US state tax on goods and services used in a state when no sales tax was collected at the point of sale. Sales tax is collected by the seller, but use tax is self-reported and paid by the buyer. The use tax rate is usually the same as the state's sales tax rate.
Most people know about sales tax. It's the tax added to the price of goods and services at the point of sale. The consumer simply pays an extra percentage based on the price. Use tax is less well known but just as important. It matters most for businesses and people who buy from out-of-state sellers. So, what is use tax? Let's look at the details.
What is use tax?
Use tax is a tax on the use, storage, or consumption of goods within a state when sales tax was not collected at the point of sale. It works alongside sales tax. It captures tax on purchases that fall outside the normal sales tax system. We cover this in more detail in Sales and Use Tax Defined and Explained; a Guide for CPAs.
For example, say you buy an item online from a seller in another state and pay no sales tax. You must then report and pay use tax to your state. Use taxes make sure states get tax revenue on out-of-state purchases. They also level the playing field between in-state and out-of-state sellers.
What is the purpose of use taxes?
The main purpose of use taxes is to prevent tax evasion and let states collect revenue on goods and services used within their borders. Without use taxes, consumers could avoid tax by buying from states with lower or no sales taxes. This would unfairly hurt local businesses and cut state revenues.
Use taxes also support state budgets. They help fund public services such as education, infrastructure, and public safety. By making sure all goods and services used in a state are taxed, use taxes add to the state's overall financial health.
What is the difference between use tax and sales tax?
The difference between use tax and sales tax is who collects and pays it. The seller collects sales tax at the point of sale and sends it to the state. Use tax is the buyer's responsibility. The consumer self-assesses it and pays it directly to the state when no sales tax was collected at the time of purchase.
Sales tax
- Point of collection: Collected by the seller at the point of sale.
- Responsibility: Seller's responsibility to collect and remit.
- Example: Buying a book at a local bookstore, where the store adds sales tax to your bill.
Use tax
- Point of collection: Paid by the buyer directly to the state.
- Responsibility: Buyer's responsibility to report and pay.
- Example: Buying a book online from an out-of-state retailer that does not charge sales tax.
How do sales and use tax work together?
Sales and use taxes are designed to work together. When sales tax is not collected, use tax steps in so the purchase is still taxed. This helps states keep a steady stream of tax revenue. It also keeps things fair between in-state and out-of-state sellers.
For example, a business in California might buy office supplies from a vendor in Oregon, where there is no sales tax. If the vendor does not charge California sales tax, the business must pay California use tax on those supplies. This means the purchase is taxed correctly under California's tax laws.
When does use tax apply?
Use tax applies when you buy taxable goods or services for use in your state and the seller did not collect your state's sales tax. Both individuals and businesses need to know these rules to follow state tax laws. Here are the key cases where use tax usually applies:
Out-of-state purchases
When you buy goods from an out-of-state seller who does not charge your state's sales tax, you must pay use tax. This often happens with online purchases, catalog orders, and purchases made while traveling.
- Example: You order a piece of furniture from an online retailer based in a state with no sales tax. The retailer does not collect your state's sales tax. So you must report and pay use tax on the purchase.
Untaxed services
Some states charge use tax on certain services if they are used within the state and were not taxed at the time of purchase.
- Example: You hire a consultant from another state to provide services for your business. If the service is taxable and no sales tax was collected, you must pay use tax on the service.
Equipment and supplies for business use
Businesses often buy equipment and supplies from out-of-state vendors. If these vendors do not collect sales tax, the business must self-assess and pay use tax.
- Example: A construction company in Texas buys machinery from a manufacturer in another state that does not collect Texas sales tax. The company must pay Texas use tax on the machinery.
How much is use tax?
The use tax rate is usually the same as the sales tax rate in the state where the goods or services are used. This rate can vary a lot from state to state. It can even vary within a state, depending on local tax rates.
Who is responsible for paying use tax?
Both individuals and businesses can be responsible for paying use tax. Businesses are audited for use tax more often. But individuals must also pay use tax on out-of-state purchases that did not include sales tax.
For Individuals
- Personal purchases: Say you buy a computer from an online retailer based in a state without sales tax. If the retailer does not collect your state’s sales tax, you must report and pay use tax to your state.
- Remote sales: More and more online retailers collect sales tax for the buyer’s state. But when they do not, the duty falls on the buyer.
For Businesses
- Business purchases: Businesses must track and report use tax on all purchases where sales tax was not collected. This includes office supplies, equipment, and even certain services.
- Audit risk: Businesses often face tax audits to check use tax compliance. So it's vital to keep accurate records and pay all use tax due.
How do you report and pay use tax?
To report and pay use tax, you work out what you owe and file a use tax return with your state. The process varies by state, but it usually involves these steps:
- Determine the taxable amount: Add up all taxable purchases where sales tax was not collected.
- Apply the use tax rate: Use your state’s use tax rate to work out how much use tax you owe. It is usually the same as the sales tax rate.
- File a return: Complete a use tax return form. You can often do this online through your state’s department of revenue or taxation website.
- Pay the tax: Send the payment for the use tax owed along with your return.
How do you stay compliant with use tax?
To stay compliant with use tax rules, you need careful record-keeping. Businesses should keep detailed records of all purchases, including invoices and receipts. These show whether sales tax was collected. Individuals can save receipts from out-of-state purchases to track possible use tax.
Many states offer guidance and resources to help taxpayers understand and follow use tax rules. Using these resources can help you meet your duties. It can also help you avoid penalties and interest for paying too little or no use tax.
How does e-commerce affect sales tax and use tax?
The rise of e-commerce has had a big impact on how sales and use taxes are collected. The 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. lets states require remote sellers to collect and remit sales tax. This applies even if the seller has no physical presence in the state. This rule is commonly known as economic nexus. The ruling has increased sales tax compliance among online retailers. That means consumers need to self-assess use tax less often.
However, use tax still plays a key role. It captures tax revenue from purchases where sales tax is not collected. As online shopping keeps growing, consumers and businesses must stay aware of their use tax duties under state tax laws.
Why does understanding use tax matter?
Understanding use tax and how it differs from sales tax helps individuals and businesses avoid penalties. Use taxes help states collect revenue on all taxable purchases. This promotes fairness and supports vital public services. By staying informed and keeping accurate records, businesses and individual taxpayers can meet their duties.
As commerce keeps changing, staying up to date with sales and use tax rules will matter more and more. You might be a consumer making the odd online purchase. Or you might be a business handling a large volume of sales. Either way, understanding and following use tax laws gives you financial and legal peace of mind.
Do you need help with your sales tax compliance? Book a free call with one of our sales tax experts to find bespoke solutions for your business, optimize your tax costs, and reach millions of new potential customers.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
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Frequently asked questions
What is use tax?
Use tax is a tax imposed on the use, storage, or consumption of goods within a state when sales tax has not been collected at the point of sale. This ensures that states can collect revenue on purchases made from out-of-state sellers.
How does use tax differ from sales tax?
Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax, on the other hand, is the responsibility of the buyer and is self-assessed and paid directly to the state when sales tax has not been collected.
When does use tax apply?
Use tax applies when you purchase goods or services from out-of-state sellers who do not charge your state's sales tax. It also applies to certain untaxed services and equipment or supplies bought for business use.
Who is responsible for paying use tax?
Both individuals and businesses are responsible for paying use tax. While businesses are more frequently audited for use tax compliance, individuals must also pay use tax on out-of-state purchases that did not include sales tax.
