What is use tax?

Dec 12, 2023 | Blog Posts

We often hear about "sales and use tax." But what exactly is "use tax"? How is it different from sales tax?

We often see the terms “sales and use tax” bundled together in the same sentence. But, as it turns out, that phrase does a lot of heavy lifting. While sales and use tax are similar, there’s a reason we hear about both. 

One reason that the term “use tax” can be so confusing is that there are two types. And businesses need to understand both. 

Let’s demystify use tax.

Sellers Use Tax

Often times, sales and use tax is referred to under the blanket term “sales tax.” But if we want to get very technical about it, sometimes, as a merchant, you are collecting use tax and not sales tax. What do we mean?

When collecting in a state where you are located, you are collecting sales tax. But, generally, when you are a remote (i.e. out of state) seller and are collecting tax on a transaction, you are collecting “use tax.” 

Let’s look at an example.

Say you live and operate your business in New York but also have sales tax nexus in Ohio. You collect tax on every sale you make to customers in New York and Ohio. When collecting from New York buyers, you collect sales tax. But when collecting from Ohio buyers, you would technically be collecting Ohio use tax. 

Sales and use tax are typically the same amount, just referred to by a slightly different term depending on if you, the merchant, are an in-state or remote seller.  Though, there are some cases where the sales tax and use tax are slightly different. For example, states like Texas and Alabama now allow some out-of-state sellers who are collecting voluntarily to collect a single local use tax rate rather than the tax rate in each city, county and special taxing jurisdiction.

Sellers use tax is also sometimes called vendor’s use tax, or retailer’s use tax, depending on the state. In some states, you will apply for a different type of tax license depending on if you are collect in-state sales tax or remote use tax. For example, in Ohio if you are an in-state vendor you register for a vendor’s license, but if you are a remote vendor you register for a sellers use tax account.

Consumer Use Tax

If a product is taxable, sales tax is due at the time of sale of that product. But, in some cases, the seller is not required to collect sales tax. This is likely because the seller does not have sales tax nexus in that state. 

As a consumer, making a purchase and not having to pay sales tax can seem like a happy twist of fate and a few extra dollars in your pocket. Except that states still require that consumers pay the tax. In this case, that’s the “consumer use tax.” 

Consumer use tax is paid when a buyer purchases something they intend to use or consume in a state but don’t pay sales tax on it. Instead, use tax, paid by the consumer, is due to the state. If your state has income tax, there is generally a line on your state sales tax form for you to report any use tax owed. 

Why does consumer use tax exist? Basically, this is the state’s way of ensuring that they get their cut of the sales (or, in this case, use) tax due on any transaction. States use sales tax to pay for budget items like hospitals and firetrucks, so they are highly invested in ensuring that they collect every single tax dollar. It’s helpful to remember that sales tax is a tax on a sale, not a tax on the actual item or items sold. That’s why you’ll charge or pay sales tax even when selling or buying used items. 

Businesses! Don’t Forget Consumer Use Tax

It’s important for businesses to consider consumer use tax, too. If you purchase anything for use in your business without paying sales tax, you must account for it. If you are purchasing items for resale and don’t pay sales tax, you must present a resale certificate. But if you are purchasing items for use in your business (like coffee, warehouse shelving or computer equipment) then you must ensure that you pay the use tax to the state if you didn’t pay sales tax on the purchase. One dirty little secret is that state sales tax auditors check if a business reports consumer use tax. If you don’t, they may use that as an excuse to take a closer look into your books and to ensure you are sales tax compliant. Yikes!

What’s the difference between sales tax & use tax? 

To sum it up, sales tax is a blanket term for a percentage of a sale charged at the time of purchase that is then sent on to state and local jurisdictions and used to pay for budget items like highways and public schools. 

But technically, sales tax is charged by an in-state merchant while use tax is charged by a merchant who is located out of state but still required to collect sales tax to in-state buyers. These are generally e-commerce transactions.

Consumer use tax is due when a buyer makes a purchase but does not pay sales tax on that purchase at the point of sale. Instead, they are responsible for remitting that use tax to the state. States are invested in receiving tax dollars, no matter if from a buyer or a seller, because they rely on those funds for the state budget. 

Have questions about the differences between sales tax, sellers use tax and consumer use tax? We have answers. Contact HOST today!