What Are the Differences Between a Sales Tax and a Use Tax?

Consumption taxes are a significant component of how state and local governments generate revenue across the United States, applied to the purchase of goods and services. Understanding how these taxes function is important for both consumers and businesses.

Understanding Sales Tax

Sales tax is a tax imposed by state and local governments on the sale of various goods and services. It is typically calculated as a percentage of the retail price of a taxable item or service. The seller is generally responsible for collecting this tax from the buyer at the point of sale. Once collected, the seller then remits the accumulated sales tax to the appropriate state or local taxing authority.

This tax primarily applies to transactions within the state where the sale takes place. Common scenarios include purchasing clothing from a retail store, dining at a local restaurant, or buying electronics from a brick-and-mortar establishment. The sales tax is fundamentally a tax on the transaction itself, levied when ownership of goods or the right to use services transfers from the seller to the buyer.

Understanding Use Tax

Use tax is a tax imposed on the storage, use, or consumption of tangible personal property or services when sales tax was not collected. This occurs when a purchase is made from an out-of-state vendor not required to collect sales tax in the buyer’s state. The purchaser is responsible for remitting use tax, ensuring purchases made outside a state’s taxing jurisdiction for use within that state are taxed similarly to in-state purchases.

Common applications include online purchases from retailers without a physical presence in the buyer’s state, or items bought in a state with no sales tax or a lower rate and then brought into the home state for use. Many states provide mechanisms for individuals to report and pay use tax, often through annual income tax returns or dedicated online portals.

Comparing Sales Tax and Use Tax

The primary distinction between sales tax and use tax lies in who collects and remits the tax, and under what circumstances each applies. Sales tax is collected by the seller from the buyer at the point of sale for in-state retail transactions. Conversely, use tax is typically self-assessed and paid directly by the buyer to the state when an out-of-state vendor did not collect sales tax on a purchase intended for use within that state. This difference in collection mechanism means that while sales tax is visible on a receipt, use tax often requires the purchaser to proactively report and pay it.

Sales tax applies to retail transactions occurring within the taxing jurisdiction, ensuring that local purchases contribute to state revenue. Use tax, however, becomes applicable when sales tax was not paid on an acquisition of goods or services from an out-of-state source, but these items are subsequently stored, used, or consumed within the state. This mechanism prevents consumers from avoiding taxation by purchasing goods or services from vendors located outside their home state. Without use tax, an individual could buy an expensive item online from a retailer in another state, pay no sales tax, and effectively gain a tax advantage over someone buying the same item from a local business.

The fundamental purpose of use tax is to complement sales tax, creating a unified consumption tax system. Sales tax captures revenue from transactions within the state’s borders, while use tax ensures equitable taxation regardless of where a purchase originates. Both taxes work together to ensure that all taxable transactions are subject to a similar tax burden, thereby leveling the playing field for in-state and out-of-state businesses. This combined approach helps states generate consistent revenue and prevents tax avoidance through cross-border shopping.