We see a lot of variations on this question: “A state said I had to register to collect use tax, not sales tax. What’s the difference?”
To make a long story short, sales and use tax generally refer to the same thing: A percentage tax on the price of a sale that is collected by a merchant and remitted to the government.
While every state is different, California’s definition of sales and use tax is typical of other state definitions around the country.
- California sales tax is imposed on every retailer for the privilege of making retail sales of tangible personal property in the state.
- California use tax is imposed on the purchase of tangible personal property from any retailer for storage, use, or consumption in California. (Source)
What this means for customers is if they go to the store in one of the 45 states + the District of Columbia that has a sales tax, and buy tangible personal property – say a toothbrush – to take home and use, they would pay sales tax to the merchant. But if they purchase a computer from a merchant in another state online, and that merchant doesn’t charge them any tax on the transaction, they would owe use tax to their home state. In the state’s mind, the product was bought to be used in the state where that consumer lives, they should have paid sales tax on it. (I didn’t say it has to make sense!)
States don’t generally do a great job of enforcing the consumer use tax. That’s one reason why internet sales tax measures like the Marketplace Fairness Act (MFA) and the Remote Transaction Parity Act (RTPA) have recently cropped up. States want to pass the burden of collecting all use tax on to sellers. (As opposed to how things are now, where merchants have to collect use tax from buyers only in states where the merchant has nexus.)
To states this is a great idea – they can more easily enforce use tax and the merchants who bear the burden of collecting that use tax live out of state and can’t vote state lawmakers out. But here at TaxJar, we’ve always maintained that internet sales tax is patently unfair to online sellers.
What does the difference between sales and use tax mean for merchants?
If your business is based in a state and you sell to customers also in your state, you charge them sales tax.
But if your business is not based in a state, but you have “nexus” there for some other reason, then you charge those customers use tax.
Use Tax Example:
You live in Florida but sell through Amazon FBA and often ship your items to the Amazon fulfillment center in Indiana, giving you nexus there. When you sell an item to a customer in Indiana, you are technically charging them use tax.
Other Times You Might Run Into Use Tax
Merchants typically run into the term “use tax” when doing one of two things:
If you are based out of state but have nexus in a state, chances are you’ll find yourself applying for the “use tax” portion of a sales & use tax license. And when you go to file online, you may find yourself filling out the “use tax” portion of an online filing system.
One last thing to note. Sales and use tax is mutually exclusive. This means you won’t have to pay or charge a sales tax and a use tax on an item. It’s one or the other. Whew!
Have questions about sales and use tax and their definitions? Start the conversation in the comments.