The term use tax refers to a conditional sales tax. The use tax is charged on any goods purchased without paying a sales tax when one would normally be applied in the consumer’s home state. One of the most common instances of the use tax is when someone buys goods from another state where no sales tax is levied and the consumer intends to use, store, or distribute the goods where a sales tax would normally apply. The rate is generally the same as the local sales tax rate and consumers are responsible for calculating and paying use taxes, which makes it difficult to enforce.
Key Takeaways
- The use tax is imposed on goods that are used, distributed, or stored in an area where sales tax is normally imposed but are purchased where no sales tax is collected.
- The use tax is generally the same rate as the local/state sales tax.
- Consumers are responsible for calculating and remitting the use tax to the government.
- The purpose of the use tax is to protect in-state retailers against competition from out-of-state sellers that don’t have to collect sales taxes.
- The use tax is difficult to enforce because consumers must report and pay the tax themselves.
Understanding Use Taxes
The use tax is a type of sales tax charged on certain goods. Unlike a sales tax, the use tax is only applied in specific circumstances rather than on all goods and services. Instances include:
- When a consumer purchases items outside their home jurisdiction and no sales tax is charged but intends to use or store those goods in an area where a sales tax is imposed.
- When goods are purchased out-of-state and no sales tax is charged.
- Professionals purchasing trade-related goods in a jurisdiction without sales tax to use in an area with a sales tax.
The use tax rate is the same as the local sales tax rate, including both state and local taxes. Consumers must calculate and pay the use tax on applicable purchases. Failure to pay use taxes may result in penalties and interest charges.
For example, consider a Californian who purchases clothing from a retailer in Oregon. Oregon doesn’t collect sales tax, but the Californian must pay a use tax to California when they bring those goods back. If the person bought groceries instead, they likely wouldn’t owe the use tax, as California doesn’t tax most groceries.
Use Tax vs. Sales Tax
A use tax is ultimately akin to a sales tax. A sales tax is imposed on the sale of goods and services and is collected by the seller, who remits it to the government. The use tax, on the other hand, is calculated and remitted by the end consumer. The rate for both taxes is generally the same, but the way they are assessed and paid differs.
The use tax is often harder to enforce than the sales tax and is usually applied to larger purchases of tangible goods.
45 States with Use Tax
Interestingly, there are 45 states in the U.S. that impose a use tax—the same number that have a sales tax.
Use Tax and Nexus
A nexus refers to a significant physical presence, such as a sales office or warehouse. You can even have a nexus by simply having an employee or affiliate in a state. Retailers typically aren’t required to collect sales tax in states where they lack a physical presence, meaning consumers must calculate and remit the use tax. Whether a business owes sales taxes is contingent on how nexus is defined by a state.
Tensions from the e-commerce industry’s failure to pay sales taxes have led some states to enact laws mandating businesses to pay their share, irrespective of physical presence. An example is New York’s Amazon laws, which require internet retailers to remit sales taxes despite not having a physical presence.
Purpose of Use Tax
The use tax aims to shield in-state retailers from unfair competition against out-of-state sellers that aren’t required to collect tax. It ensures that all state residents contribute to funding local programs and services, even if they shop elsewhere. Although it’s hard to enforce because consumers need to report and pay it, governments need it to recover revenue that’s lost from out-of-state purchases.
Example of Use Tax
For example, suppose a Californian buys clothing from an online retailer in Oregon, where no sales tax is collected. The Californian is still required to pay a use tax on the clothing purchase to California’s tax authority. In contrast, groceries purchased in Oregon generally wouldn’t be subject to use tax if brought to California since the state doesn’t tax most groceries.
What Does the Use Tax Mean?
The use tax is a type of sales tax imposed on goods purchased and brought home from outside a consumer’s jurisdiction when no sales tax is charged there. The rate is generally the same.
What’s the Difference Between the Use Tax and the Sales Tax?
A sales and use tax are nearly identical in function: both are applied to goods and services. The difference lies in their calculation and remittance process. A sales tax is charged at the time of purchase and collected by the seller. Conversely, a use tax is calculated and paid by the consumer after the purchase. The rate generally remains the same as the local sales tax.
How Much Is the Use Tax in California?
The use tax rate in California is 7.25%, aligning with the state’s sales tax rate.
The Bottom Line
Taxation comes in many forms, but the use tax is unique and often overlooked. Nearly all states impose a use tax on goods and services bought outside the state if they are brought into a state where sales tax is typically paid. The purpose is to ensure fair competition and compliance within the state. Although enforcing this tax can be challenging, it’s essential for maintaining a fair marketplace and funding local services. Consult your state’s tax department to learn how to fulfill any use tax obligations.
Related Terms: sales tax, tax compliance, state tax department.
References
- West Viriginia State Tax Department. “Municipal Sales and Use Tax”.
- Government of Massachusetts. “Sales and Use Tax”.
- California Department of Tax and Fee Administration. “California Use Tax, Good for You. Good for California”.
- Government Accountability Office. “Sales Tax”, Page 11.
- Small Business Administration. “An Analysis of Internet Sales Taxation and the Small Seller Exemption”, Page 7.
- Government Accountability Office. “Sales Tax”, Page 5.
- Government of Massachusetts. “Determining nexus for Massachusetts Corporate Excise tax purposes”.
- Small Business Administration. “An Analysis of Internet Sales Taxation and the Small Seller Exemption”, Page 16.
- Oregon Department of Revenue. “About sales tax in Oregon”.
- California Department of Tax and Fee Administration. “Know Your Sales and Use Tax Rate”.
