Sales Tax vs Use Tax: What You Should Know
Short answer
Sales tax is a tax collected by a seller at the point of sale on goods or services purchased within a state, while use tax applies when goods are bought outside the state and used within it without paying sales tax. Both taxes ensure states receive revenue fairly from purchases regardless of where they happen.
What is Sales Tax and How Does It Work?
Sales tax is a consumption tax imposed by state and local governments on retail sales of tangible personal property and some services. When you buy an item from a store or online seller located in your state, the seller collects the sales tax at checkout and later remits it to the state government. This tax is expressed as a percentage of the purchase price and varies widely by state and locality.
For example, if you buy a laptop priced at $1,000 in a state with a 7% sales tax, the store will add $70 to your bill, making the total $1,070. The seller then sends that $70 to the state tax authority. This process makes it easy for states to collect revenue at the point of sale.
Sales tax is typically visible on your receipt, and it applies only to purchases made within the taxing state or locality. Some items, like groceries or prescription medications, may be exempt depending on the state rules.
What is Use Tax and When Does It Apply?
Use tax complements sales tax by covering purchases made outside the taxing state for use within it, where no sales tax was paid at the point of purchase. The use tax rate usually matches the sales tax rate in the buyer’s state. It prevents buyers from avoiding taxes by buying goods elsewhere or online from out-of-state sellers who do not collect sales tax.
For example, if you live in a state with a 7% sales tax and order a $1,000 laptop from an out-of-state internet retailer who does not charge sales tax, you owe $70 in use tax. You must report and pay this tax directly to your state’s tax department, often on your annual tax return or a special use tax form.
Use tax is less visible because it relies on the buyer to self-report, but many states educate consumers and require businesses to collect and remit it under certain conditions.
Why Do Sales Tax and Use Tax Matter to You?
Understanding the difference matters because it affects how much tax you owe and when you owe it. If you don’t pay the appropriate use tax on out-of-state purchases, you could face penalties or interest for unpaid tax. Also, if you’re a seller, you need to know your responsibility to collect sales tax or advise buyers about use tax.
For consumers, knowing when use tax applies helps with budgeting and avoids surprises when filing state taxes. For example, if you buy furniture from a neighboring state without sales tax, you are still responsible for paying the use tax in your home state.
With more online shopping, use tax enforcement has increased, making compliance more important. Also, knowing the difference helps clarify confusing terms like state tax or seller’s use tax, which relate but differ in application.
How Does Sales Tax Differ From State Tax and Seller’s Use Tax?
“State tax” is a broad term that may refer to any tax imposed by a state, including income tax, property tax, and sales tax. Sales tax is a specific kind of state tax charged on sales transactions.
Seller’s use tax refers to a seller’s obligation to pay use tax on inventory or goods they purchase without paying sales tax when those goods are later sold or used. For example, a business buying equipment out-of-state without paying sales tax may owe use tax to the state. This is different from sales tax, which is charged to the final consumer.
In summary:
| Tax Type | Who Pays It | When? | Purpose |
|---|---|---|---|
| Sales Tax | Buyer at point of sale | When purchasing within the state | State revenue from sales |
| Use Tax | Buyer or business | When purchasing out-of-state without sales tax | Ensures tax is paid on use |
| Seller’s Use Tax | Seller (business) | On purchases for resale or business use | Compliance for business taxes |
What Are Common Confusions With Sales and Use Tax?
People often confuse sales tax with use tax because both are consumption taxes and often have the same rates. The key difference is who collects and pays them and when. Sales tax is collected by the seller at the point of sale; use tax is self-reported by the purchaser when no sales tax was paid.
Another confusion is with VAT (Value-Added Tax), which is a tax on the value added at each stage of production, not just final sale. Also, sales tax differs from excise tax, which is charged on specific goods like gasoline or tobacco.
Understanding these distinctions can help avoid mistakes on tax filings and identify when you might owe tax even if it wasn’t collected upfront.
How Should You Handle Sales and Use Tax in Your Purchases?
To manage sales and use tax correctly:
- Check if the seller charges sales tax: If they do, you usually don’t owe use tax.
- Know your state’s rules: Some states require reporting large purchases or all out-of-state purchases.
- Keep receipts: Document your purchases for tax records.
- Report and pay use tax if needed: Many states have a line on the state income tax return for use tax.
- For businesses, understand seller’s use tax: Track inventory purchases without sales tax carefully.
If unsure, contact your state’s department of revenue for guidance or consult a tax professional.
Where Can You Get Help or More Information on Sales and Use Tax?
Many states provide online resources explaining sales and use tax obligations for consumers and businesses. You can visit your state’s tax department website for specific rules and forms.
The Consumer Financial Protection Bureau and IRS websites offer general tax information but focus more on federal taxes. For questions about state sales and use tax, state websites are best.
If you face issues or suspect mistakes in tax charges, state tax offices can provide assistance. For complex situations, such as running a business with multi-state sales, professional tax advisors are recommended.
Frequently asked questions
Do I have to pay use tax on online purchases?
If you buy from an out-of-state seller who doesn’t charge sales tax, your state likely requires you to pay use tax on the purchase price. Check your state’s rules for thresholds and reporting methods.
How is use tax reported and paid?
Many states include a line on the income tax return for use tax. Others have separate forms or online payment systems. Keeping records of your out-of-state purchases will help with reporting.
What if my seller charges the wrong sales tax rate?
Contact the seller to correct the error. If you overpaid, they may refund you. If underpaid, the seller might owe the difference. Keep receipts for proof.
Is sales tax the same as state income tax?
No. Sales tax is on purchases of goods and some services, while state income tax is charged on your earnings. They are separate taxes with different rules and uses.
Can businesses avoid use tax by buying out-of-state?
No. Businesses must pay use tax on out-of-state purchases for use or resale if no sales tax was charged. Failure to pay can lead to penalties.
Are all items subject to sales tax?
No. Some items like groceries, prescription drugs, or clothing may be exempt or taxed at lower rates depending on the state. Check local tax laws for details.