What Is Use Tax? Understanding Use Tax vs. Sales Tax

Under most state laws, consumers must pay sales tax on goods and services they purchase. Typically, a seller collects the sales tax and remits it to state and local governments. But when an out-of-state retailer fails to collect sales tax, the burden shifts to consumers. They must calculate the amount owed on taxable items purchased, and then pay state and local governments directly. This tax is classified as a consumer use tax.

What is a use tax?

A use tax is a required contribution on goods and services that was not collected as sales tax at the time of purchase. If your local tax and fee administration charges sales tax as a percentage of a purchase price, that tax is owed regardless of whether a seller collects it. Practically, this means that if you buy a product from an out-of-state seller that does not collect tax, you must calculate your use tax rate and pay tax directly to state and local agencies.

Your local use tax rate will be the same as your local sales tax rate. Imagine you live in a region with a 5% local tax rate on retail purchases. If you order a $440 television online, the seller is supposed to add 5% to the sales price. If an online retailer chooses not to collect tax, the burden shifts to you as the buyer. You must calculate and remit any use tax on taxable goods. Because use tax rates align with sales tax rates, your tax liability would be $22.

What is the purpose of a use tax?

A use tax serves the same purpose as a sales tax or a value added tax (VAT). Use taxes fund state and local initiatives that include infrastructure, government administration, lending programs, and elder care. In some jurisdictions, sales and use taxes provide governments with their greatest source of revenue in a calendar year. Yet in states without a sales tax or a use tax, such asMontanaandOregon, government revenue must come from other sources such as property taxes, income taxes, and administrative fees.

When do you pay use tax?

Each state has its own laws governing when to pay use tax. Many allow residents to remit use tax once per calendar year. For instance, the California Department of Tax and Fee Administration (CDTFA) lets residents pay use taxes on April 15, the same as federal and state deadlines for filing income tax returns. The CDTFA also lets residents pay any tax owed each time they make a purchase. This may ease record-keeping burdens for some purchasers. You can check with your state’s department of taxation for laws specific to your region.

Use tax vs. sales tax

Use tax and sales tax are two sides of the same coin. They are assessed at the same rates, and they fund the same programs. The difference is when and how the tax is collected.

What are the similarities?

Sales tax and use tax are assessed at the same rate. For instance, if a municipality has a 7.85% sales tax, it will also have a 7.85% use tax. Sales and use taxes also fund the same programs. And the two taxes apply to the same retail items. If a state levies sales tax on furniture but not groceries, it also levies use tax on furniture but not groceries. Both sales and use tax are only charged by the state in which the buyer resides. For instance, if a buyer in Idaho purchased a product from an online seller located in Oregon, the Oregon seller won’t charge sales tax because that state doesn’t have one. In this case, the Idaho-based buyer must pay use tax because their state does tax retail purchases.

What are the differences?

The difference in sales tax and use tax comes down to collection. Retailerscollect sales taxand remit it to state and local governments. Purchasers remit use tax to governments. You only have to remit use tax in cases where there was no sales tax paid at the time of purchase of a taxable item. If you have already paid sales tax, you do not owe use tax.