Sales tax compliance comes in many forms, and use tax is one of them. You may see the term “sales and use tax” when applying for a sales tax permit in a state, filing a sales tax return in a state, or checking your economic nexus thresholds within a state.
What’s the definition of sales tax? What’s the definition of use tax? What’s the difference between use tax vs. sales tax? What states enforce use tax on the seller or the buyer?
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 or consumer and remitted to the government. However, there are subtle differences in how these taxes are collected and remitted.
Sales Tax Definition
The definition of sales tax is a tax on the sale, transfer, or exchange of a taxable item or service, at the point of sale. Sales tax is added to the price of the item and charged to the consumer.
Businesses with nexus, meaning they have a physical presence or have reached the threshold of economic transactions or sales in that state, must charge state sales tax.
Sellers Use Tax
You may see the term “sellers use tax” as well, which is another term for sales tax. Seller use tax is a transaction tax, calculated as a percentage of the sales price, and remitted by an out-of-state seller to the state.
Sellers use tax only applies to “remote sellers.” Remote sellers are generally defined as businesses who have nexus in the state (such as economic nexus) but who are not based in the state.
According to Alabama, “Sellers use tax is imposed on the retail sale of tangible personal property sold in Alabama by businesses located outside of Alabama which have no inventory located in Alabama, but are making retail sales in Alabama via sales offices, agents, or by any significant recurring contact or “nexus” with Alabama.”
Use Tax Definition
The definition of use tax is a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is complementary to sales tax, meaning the two are mutually exclusive. Use tax is generally (but not always) collected at the same rate as sales tax.
States charge use tax on goods from out of state, where the seller did not have nexus. If the seller doesn’t have nexus, who pays use tax? The buyer.
Consumer Use Tax
Consumer use tax is just another term for use tax when the buyer pays the tax. When the buyer, or the consumer, remits sales tax, it’s called consumer use tax.
Consumer use tax is paid directly by the purchaser to the state department of revenue by filing a use tax return or, in some states, by including an amount on the income tax return filed each year with the state.
States don’t generally do a great job of enforcing consumer use tax unless it’s on an expensive item, like a car or computer. States want to collect tax from in-state sellers, out-of-state sellers that reach economic nexus, and buyers who purchase goods from out-of-state without paying sales tax, in order to “level the playing field,” as California says.
According to California, “California’s use tax applies to the use, storage, or other consumption of items in the state. Generally, if sales tax would apply when you buy physical merchandise in California, use tax applies when you make a similar purchase without tax from a business located outside the state.The use tax, which was created in July 1935, is a companion to California’s sales tax that is designed to level the playing field between in-state retailers who are required to collect tax, and some out-of-state retailers who are not. Use tax, just like sales tax, goes to fund state and local services throughout California.”
Use Tax vs. Sales Tax: Examples
If your business is based in Florida and you sell to customers in Florida, you charge them sales tax.
If your business is not based in Louisiana, but you have economic nexus there, you charge customers sellers use tax.
If you’re a consumer buying a car from New Hampshire, to be stored in Vermont, and you didn’t pay sales tax on that item when buying, then you may be charged use tax by the state of Vermont.
Have questions about sales and use tax? Start the conversation in the comments.