Use tax vs. sales tax

Use tax vs. sales tax is a common question. That's because the United States system actually includes something that operates very differently from a typical consumption tax. It’s called use tax. Here’s everything you need to know about it.

What is Use Tax?

Use tax is a caveat to the traditional sales tax system, whereby businesses and retailers are responsible for charging, collecting, and remitting tax dollars. Under these laws, the customers and buyers are responsible for calculating and submitting the tax money.

It's designed to get more tax revenue, to collect tax dollars on purchases even when businesses don’t have a sales tax nexus in that state.

Since the government can’t force those businesses to collect sales tax, the government turns to the in-state customers. The residents have to pay a little tax for whatever taxable products they purchase outside of state and bring home. So, in a sense, the states aren’t taxing the sale of the product, they’re taxing the use of the product. Get it?

As a result, it also helps protect in-state sellers, who are always subject to sales tax. Requiring residents to pay a tax on out-of-state purchases evens the playing field for local businesses.

It's actually becoming less relevant, thanks to economic nexus laws that have sprouted up since the Wayfair Supreme Court decision in 2018. Economic nexus laws expand the scope of the traditional sales tax system. State governments are now recouping tax revenue directly from remote sellers, rather than relying on their citizens to pay use tax for things they purchased out of state.

That said, there are still plenty of sales happening below economic nexus thresholds, where the remote seller sales tax doesn’t apply. And these sales could be subject to use tax.

How does Use Tax work?

The process is pretty straightforward and stays on the customer side of the purchase. Here’s a quick run-through of how it operates, from the transaction to the tax return.

Point of sale

What’s taxed? Well, all products that are taxable under the customer’s state’s law. Let’s say Texas taxes televisions, and you live in Texas. When you order a TV from Oklahoma, from a seller who has no Texas nexus, then you won’t pay any sales tax to the seller. The transaction payment is just the plain product price. But then separately, you must pay use tax to Texas.

Paying

You must calculate the tax on the product based on your local sales tax rates. Then you enter it as a line item on your annual income tax return.

Enforcing

If a buyer does not pay use tax to their state of residence, they could face interest and penalties. But to be honest, compliance is pretty hard for states to enforce. Typically it’s successfully enforced on large purchases of tangible products, such as cars.

What is Sales Tax?

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and certain services. Unlike use tax, sales tax is collected directly by the seller at the time of the transaction and then remitted to the tax authority. Businesses with a sales tax nexus in a state are legally required to collect this tax from customers.

Sales tax rates and rules vary widely between states and even between cities or counties within a state. This tax is a significant source of revenue for many states, funding public services like schools, roads, and emergency services.

If you want to dive deeper you can read more in our US Sales Tax Guide.

How does Sales Tax work?

Sales tax is a transaction-based tax collected by businesses at the point of sale. It's one of the primary ways state and local governments generate revenue. Here’s how it works:

Businesses collect tax at checkout

When a business sells a taxable product or service, it is responsible for collecting the correct amount of sales tax from the customer at the time of the transaction. This applies to both in-store and online purchases, as long as the seller has a sales tax nexus in the buyer’s state.

The tax is added to the price of the item or service and clearly shown on the receipt.

Sales Tax nexus determines liability

A business only has to collect sales tax in states where it has nexus, meaning a significant connection. Traditionally, this meant a physical presence (like a store, warehouse, or employees), but today many states enforce economic nexus laws. These laws require businesses to collect sales tax once they exceed a certain amount of sales or transactions in that state—even if they don’t have a physical location there.

Businesses remit the tax to the state

After collecting sales tax from customers, businesses must report and send those funds to the state or local tax authority. This usually happens on a monthly, quarterly, or annual basis, depending on the seller’s volume.

States require accurate reporting and on-time filing, and failure to comply can lead to penalties or audits.

Sales Tax applies to many goods and some services

Sales tax generally applies to tangible personal property like electronics, clothing, and furniture. Some states also tax services, digital goods, or subscriptions, while others exempt necessities like groceries or medicine.

It’s up to the business to understand what’s taxable in each state where they sell.

The difference between Use Tax and Sales Tax

While use tax and sales tax are closely related, they apply in different situations and are collected in different ways:

In short:

• Sales tax is collected by sellers at checkout.

• Use tax is paid by buyers after the fact—usually for out-of-state or online purchases where sales tax wasn’t collected.

How does it affect business owners?

When you’re the seller

Use tax is the buyer’s responsibility. That’s what we’ve been saying! But actually, as a seller, you still have some obligations. That’s because some states have Notice & Report laws.

Notice & Report laws are special tax requirements for remote sellers with no physical presence — or even any nexus! — in the state. Following these laws, you’re responsible for notifying certain customers that they need to pay use tax to their state revenue office, and then reporting the list of these customers (and the amount of tax they owe) directly to that revenue office. Check our guide for a list of states with Notice and Report laws.

When you’re the buyer

Use tax still applies to some B2B transactions. If you’re purchasing items for your business, you could indeed be liable! You should pay careful attention to the laws wherever your business is located, particularly if you store inventory or purchase physical equipment for an office space.

State auditors often find mistakes in how businesses handle their tax responsibilities. They’re likely to scrutinize invoices that show zero sales tax, and then they’ll ask you to provide a valid exemption certificate or proof that you paid use tax.

How Quaderno can help with sales tax

Now that you have a good understanding of use tax, you can learn more about the ins and outs of the traditional sales tax scheme throughout the US. We have a variety of articles to help you, from general rules about US sales tax to the specific difference between origin- and destination-based taxes.

Quaderno's tax automation software handles tax calculations, monitors your economic nexus thresholds, sends automatic receipts and provides instant tax reports for tax season. All of your accounting and tax data can be stored securely in one place.

To see how our on-the-fly calculations work in action, try out our free sales tax calculator by adding in the base price of your product and a US zip code.