Gail Cole May 18, 2023
“Use tax” and “sales tax” are often lumped together as “sales and use tax,” but they’re not exactly the same. If you’re engaged in business or live in a state with a sales and use tax, you should understand use tax and especially the difference between sales taxes and use taxes. Here’s what you need to know.
A complement to sales tax, use tax is a tax on taxable goods and services that are consumed, stored, or used in the jurisdiction. Use tax only kicks in if sales tax wasn’t applied to a taxable transaction at the point of sale for one of the following reasons:
For a thorough explanation of sales tax, read What is sales tax? Definition and examples.
There are key differences between sales tax and use tax: Namely, who is liable for paying and reporting sales taxes vs. use taxes.
Sellers are responsible for collecting and paying sales tax to the appropriate taxing authority in all states. However, who is ultimately liable for sales tax in the event of an audit depends on the state. Specifically, whether it’s a “vendee” or a “vendor” state (also called “consumer tax” and “seller privilege” states).
In “vendee” or “consumer tax” states, which is most states, sales tax is imposed on the buyer. Businesses cannot pay the sales tax themselves — they’re legally required to collect sales tax from the buyer and separately state sales tax on invoices and receipts.
California and Texas are examples of consumer tax states. Sales tax in these states is considered a trust tax because vendors collect the tax from consumers and hold on to it until it’s time to remit it to the appropriate taxing authority. The state trusts the business not to keep the sales tax monies.
In “vendor” or “seller privilege” states, sales tax is imposed on the business for the privilege of doing business in the state. Although businesses can absorb sales tax and pay it themselves in these states, they typically pass the tax on to the consumer instead. Hawaii and New Mexico are seller privilege states.
In the event of an audit, states cannot go after a consumer for unpaid sales tax in a seller privilege state; they can only hold the seller liable. In consumer use states, tax officials can hold either the buyer or the seller liable for unpaid tax.
Who is responsible for paying use tax depends on what type of use tax it is: consumer use tax or seller use tax.
Consumer use tax vs. seller use tax
The buyer is responsible for figuring out how much consumer use tax is due and paying it to the appropriate taxing authority if:
Buyers self-assess consumer use tax — it doesn’t appear on an invoice.
Businesses must also self-assess consumer use tax when they use inventory or other items purchased tax free for resale or another purpose (e.g., incorporation into an end product). For example:
If a grocery store pulls paper towels off the shelf to clean up a spill, it would be liable for consumer use tax on the paper towels.
If a restaurant comps a meal to a disgruntled customer, it would owe use tax on the value of that meal.
Seller use tax, also known as vendor or retailer use tax, is different. In some states, like Alabama, sales tax is only for intrastate sales and seller use tax is for interstate sales. Thus, out-of-state businesses that have nexus with the state (i.e., an obligation to collect sales and use tax) are required to collect and remit seller use tax rather than sales tax. Learn more about sales tax nexus.
At the point of sale, there’s no noticeable difference between seller use tax and sales tax: Both are applied by the retailer at checkout. Perhaps that’s why seller use tax is commonly referred to as sales tax even when technically it isn’t.
The taxing authority in each jurisdiction determines how frequently businesses must remit and report sales tax: annually, quarterly, or monthly. When it comes time for you to report sales tax:
Note that before you can legally collect, remit, or file sales tax, you must register for a sales tax permit.
The state tax department administers both state and local sales tax in most states, but there are a few exceptions to this rule. For example:
Learn more about home-rule sales tax, where individual local jurisdictions levy and administer their local sales tax.
Seller’s use tax is reported like sales tax: The retailer is responsible for collecting it from the buyer and remitting it to the taxing authority by the due date.
However, consumers are responsible for reporting consumer use tax.
There’s usually a line for individuals to report consumer use tax on state income tax returns. States with no state income tax generally have a specific form for consumer use tax, like this Washington state consumer use tax return.
Businesses typically report consumer use tax on their regular sales and use tax return or excise tax return. If your business owes consumer use tax but doesn’t hold a sales and use tax permit, inquire about the best practice with your state tax authority or a trusted tax advisor.
In New York, for example, such taxpayers can report use tax on a personal income tax return or an individual purchaser’s report of sales and use tax.
You need to understand the difference between sales tax and use tax if you’re a business because if you don’t, you may collect, remit, or report it incorrectly. As noted above, sales tax is not the same as use tax, and sales tax requirements differ from use tax requirements.
In fact, a legal battle over the difference between sales tax and use tax in North Carolina has been filed with the Supreme Court of the United States.
Failure to collect and/or pay sales and use tax as required may result in a sales and use tax assessment, plus penalties and interest.
One of the most effective ways to reduce the burden of sales and use tax compliance is to outsource it by hiring an accounting professional, using tax automation software, or both.
Interested in learning how technology can help simplify sales and use tax compliance?
Avalara AvaTax automatically calculates rates for sales and use tax and a host of other transaction taxes worldwide.
Avalara AvaTax for Accounts Payable automates use tax compliance, giving you more control over your use tax liability and your bottom line.
Avalara Returns prepares, files, and remits sales tax returns.
Click on the links above for more details.
And if you have more questions about sales and use tax, check out our sales and use tax FAQ.
What states have a sales tax and a use tax?
Currently, every state that has a sales tax also has a use tax. Sales and use tax is imposed at the state level in 45 states, Puerto Rico, and Washington, D.C.
Most states allow local sales and use taxes in addition to the state sales and use tax. The states with no local sales tax or use tax are Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Jersey, and Rhode Island. There’s no local sales or use tax in Washington, D.C., either.
Four states have no sales tax or use tax: Delaware, Montana, New Hampshire, and Oregon. There’s no state sales tax in Alaska, but many cities and boroughs in Alaska have a local sales tax.
Is there a national sales tax in the United States?
There’s no federal sales tax or national sales tax in the United States, but not for lack of trying. In fact, Representative Earl L. Carter of Georgia introduced a national sales tax in January 2023. If enacted, the Fair Tax Act of 2023 would impose a 23% national sales tax starting in 2025, “with adjustments to the rate in subsequent years.”
It hasn’t gotten much traction.
Do all states with a sales tax have a use tax?
All states with a sales tax currently have a complementary consumer use tax.
Are sales tax rates and use tax rates always the same?
Sales tax rates are the same as use tax rates in most states, including Idaho and Texas.
However, sales tax rates and use tax rates in a jurisdiction are not always the same. In Missouri, for example, the total use tax rate in a jurisdiction is often different from total sales tax rate; when not the same, use tax rates are lower than sales tax rates. See this Missouri sales and use tax rate table for more details.
Are sales and use tax rates the same in all states?
Sales and use tax rates vary depending on the location of the transaction, and there are more than 13,000 sales and use tax jurisdictions in the United States. Each jurisdiction has its own rates and reporting codes, so getting sales and use tax rates right can be challenging.
How do you know what sales tax rate to collect?
Most states use destination sourcing to determine the location of the sale. With destination sourcing, sales and use tax rates are based on the location where the customer takes possession of the products sold or services rendered.
Some states base sales and use tax rates on the origin of the transaction, i.e., the location where the seller took the order or shipped the goods. And a few states use destination sourcing for some transactions but origin sourcing for other transactions. Here’s what you need to know about sales tax sourcing.
How do you know what use tax rate to pay?
As with sales tax, use tax rates are based on where the transaction takes place. For delivery sales, this is typically the location where the consumer took possession of the taxable goods. If you owe use tax because you pulled inventory for your own use, the rate would be based on where the goods were consumed or used.
How is sales tax and use tax calculated?
If you’re registered for sales and use tax in a state, you’re required to add sales tax or seller use tax to the sale price of all taxable goods and services. It’s always a percentage of the retail sale price and is added to the total at checkout.
For example, if you sell a book for $10 in a jurisdiction with a 5% sales tax rate, you’d charge the consumer $10.50: $10 for the book plus 50 cents in sales tax.
As noted above, sales tax rates differ depending on the location of the sale. Florida sales and use tax rates typically range from 6% to 8%; Illinois sales and use tax rates range from 6.25% to 11%.
If you buy something taxable for $10 and the seller doesn’t collect sales tax, you would owe the state 50 cents in consumer use tax.
