What Is SUT Tax? The Difference Between Sales and Use Tax

Sales and Use Tax (SUT) is a common form of consumption tax applied to the sale or use of goods and certain services. This tax generates revenue for state and local governments, funding essential public services like education, transportation, and emergency response systems. Understanding SUT is important for both consumers and businesses, as it impacts purchasing decisions and compliance requirements.

Understanding Sales Tax

Sales tax is a consumption tax levied on the sale of goods and services at the retail level. It is calculated as a percentage of the purchase price and added at the point of sale. While the consumer ultimately pays the sales tax, the seller is responsible for collecting it from the buyer and remitting it to state and local tax authorities. For example, when an individual buys clothing or electronics, sales tax is applied. Sales tax is generally applicable to transactions occurring within the same state where the seller and customer are located.

Understanding Use Tax

Use tax functions as a complementary tax to sales tax, ensuring taxable purchases do not escape taxation if sales tax was not collected at the point of sale. It applies to the use, storage, or consumption of tangible personal property or taxable services within a state, even if purchased elsewhere. The primary purpose of use tax is to create a level playing field for in-state retailers by preventing consumers from avoiding tax by purchasing from out-of-state sellers.

The responsibility for calculating and remitting use tax falls directly on the consumer or end-user, unlike sales tax which is collected by the seller. Common situations include online purchases from a retailer without nexus in the buyer’s state, or bringing a large purchase into a state from another state where it was not taxed. The use tax rate is generally the same as the corresponding sales tax rate in the state where the item is used.

Common Taxable Items and Exemptions

Sales and use taxes primarily apply to tangible personal property, such as furniture, vehicles, and most retail goods. Many states also extend SUT to certain services, though specific types vary by jurisdiction. Examples include telecommunication, repair, or digital products.

Certain categories of goods and services are commonly exempt from SUT to alleviate the tax burden or support specific sectors. Groceries (food for home consumption) and prescription medications are frequently exempt. Other common exemptions may include agricultural supplies, manufacturing equipment, or sales made to qualifying non-profit organizations. The scope of these exemptions varies considerably depending on state and local regulations.

State and Local Variations

Sales and use tax is not a federal tax; instead, it is imposed at the state level, and often by local jurisdictions such as cities and counties. This decentralized structure leads to substantial variations in rates, taxable items, and exemptions across different areas. Some states, such as Alaska, Delaware, Montana, New Hampshire, and Oregon, do not levy a statewide sales tax, though many allow local governments to impose their own. Combined state and local sales tax rates can range significantly, with some areas having total rates considerably higher than the state-only rate. This patchwork of regulations creates complexity for businesses operating across multiple states, impacting pricing strategies and compliance efforts.

Business Obligations for Sales and Use Tax

Businesses engaged in selling goods or taxable services must understand their SUT obligations, which begin with establishing “nexus.” Nexus defines the connection between a business and a state that requires the business to register and collect sales tax. This connection can be physical, such as having a store, office, or employees in a state, or economic, triggered by reaching a certain volume of sales revenue or number of transactions within a state, even without a physical presence.

Once nexus is established, a business must obtain a sales tax permit or license from the relevant state tax authority. This registration allows the business to legally collect SUT from customers. Sellers are generally required to collect the applicable tax from the buyer at the point of sale and typically must itemize this tax separately on invoices or receipts.

Businesses are then responsible for tracking the collected SUT and remitting these funds to the proper state and local tax agencies. Filing frequencies vary by state and are often determined by a business’s sales volume or collected tax amounts, commonly ranging from monthly to quarterly or annually. Accurate record-keeping of sales, collected taxes, and exemptions is important for compliance and in the event of an audit. Non-compliance can result in penalties and interest charges on uncollected taxes.