What Are the Differences Between Sales Tax and Use Tax?

Sales tax and use tax are both types of consumption taxes that apply to the acquisition of goods and certain services. While they share the common goal of taxing consumption, their application and the parties responsible for their collection and remittance differ significantly.

Understanding Sales Tax

Sales tax is a levy imposed by state and local governments on the retail sale of tangible personal property and, in many jurisdictions, on specific services. The seller acts as an agent for the taxing authority, receiving the sales tax from the customer and subsequently remitting these collected funds to the appropriate government entity. Sales tax is generally applied to transactions that occur within the geographical boundaries of the taxing jurisdiction.

What constitutes a taxable sale and the applicable sales tax rates can vary considerably across different states, and even among local jurisdictions within the same state. These variations often depend on the type of good or service being sold, with some items, such as certain groceries or prescription medications, frequently being exempt from sales tax. Businesses must accurately determine the correct tax rate based on the point of sale and the nature of the transaction.

Understanding Use Tax

Use tax functions as a complementary tax to sales tax, designed to capture tax revenue on purchases where sales tax was not collected at the time of sale. Its primary purpose is to ensure that goods and services purchased outside a state’s jurisdiction, but subsequently used, stored, or consumed within that state, are subject to a consumption tax. This mechanism helps prevent tax avoidance that might occur if consumers could bypass sales tax by purchasing items in states with lower or no sales tax.

This tax also aims to create a level playing field for in-state businesses, preventing them from being at a competitive disadvantage against out-of-state sellers who might not be required to collect sales tax. When a consumer acquires an item from a seller who does not collect sales tax, such as an out-of-state vendor without a physical presence or “nexus” in the buyer’s state, the use tax becomes applicable. The use tax rate is generally equivalent to the sales tax rate that would have been applied had the purchase occurred in the buyer’s home state.

A crucial distinction of use tax is that the responsibility for assessing and remitting the tax typically falls directly on the purchaser, not the seller. This means the buyer must self-assess the tax due on taxable goods or services for which sales tax was not paid. The use tax is not an additional tax; rather, it serves as a substitute for sales tax, ensuring that a consumption tax is paid regardless of where the purchase originated.

For businesses, tracking purchases from out-of-state vendors where sales tax was not charged is a critical compliance requirement to ensure proper use tax remittance. Individuals may also have a use tax obligation for certain purchases, often reported on their annual state income tax returns.

Common Scenarios for Application

When a consumer walks into a local retail store and purchases a new television, the sales tax is typically calculated and added to the purchase price at the register. This tax is immediately collected by the retailer at the time of the transaction, reflecting a straightforward application of sales tax on an in-state purchase. Similarly, receiving a taxable service from a local provider, such as a car repair, would also typically incur sales tax collected by the service provider.

Use tax frequently applies in situations where a sales tax was not collected at the point of sale, but the item is brought into a state where it would normally be taxable. A common scenario involves online purchases from out-of-state retailers who do not have a physical presence or “nexus” in the buyer’s state, and therefore do not collect sales tax. If a resident of a state with sales tax buys an item online from such a vendor and brings it into their home state for use, they are generally responsible for self-assessing and paying the use tax.

Another instance where use tax often applies is when an individual purchases an item in a state that has no sales tax or a lower sales tax rate, and then transports that item back to their home state where it will be used. For example, if a resident of a state with a 6% sales tax purchases furniture in a neighboring state with no sales tax, they may owe use tax on that furniture when they bring it into their home state. Businesses also frequently encounter use tax when purchasing supplies or equipment from out-of-state vendors who do not charge sales tax, requiring the business to remit the use tax directly to their state’s tax authority.

Who is Responsible for Collection and Payment

The responsibility for collecting and remitting sales tax fundamentally rests with the seller or retailer. When a taxable transaction occurs, the seller is obligated to calculate the appropriate sales tax based on the jurisdiction’s rates and add it to the purchase price. These collected funds are held by the seller as a fiduciary for the government until they are remitted to the relevant state or local tax authority.

Businesses typically register with their state’s department of revenue or similar tax agency to obtain a sales tax permit. They are then required to file periodic sales tax returns, often on a monthly, quarterly, or annual basis, detailing their total taxable sales and remitting the accumulated sales tax. Failure to collect or remit sales tax can result in penalties, interest charges, and potential legal consequences for the business.

In contrast, the primary responsibility for paying use tax falls upon the buyer, whether an individual consumer or a business. When a taxable good or service is acquired without sales tax being collected by the seller, the purchaser is obligated to self-assess the use tax due. This means the buyer must determine the correct tax amount based on the purchase price and their state’s use tax rate.

For individuals, use tax is often reported and paid annually on their state income tax returns, especially for larger purchases. Businesses, however, typically have more frequent reporting requirements, often remitting use tax on their regular sales and use tax returns alongside any collected sales tax. Maintaining accurate records of purchases where sales tax was not charged is essential for businesses to ensure compliance with their use tax obligations.