20 Jun 2023
4 min read

Use Tax: What is it and Why Does it Matter?

Uncover the often-overlooked world of "use tax." Learn its definition, how it works, and why it's crucial for consumers and businesses. Stay informed and compliant!
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Have you ever noticed how sometimes we hear a phrase so often that we don't really think about what it means? "Sales and use tax" is one of those phrases that we've probably all heard before, but have you ever stopped to think about what "use tax" actually means? While most of us are familiar with "sales" tax, "use" tax is a concept that often gets overlooked or misunderstood.

Let's take a moment to give "use tax" the attention it deserves and learn more about it.

What is Use Tax?

Use tax is officially defined as the tax on the use, consumption, or storage of a taxable item or service on which no sales tax has been paid. It is required to be paid by the consumer in cases where the seller does not collect sales tax. 

How Use Tax Works

The use tax is a form of taxation that applies to specific goods and is charged by a consumer's home municipality or state. Unlike sales tax, which is typically applied to all goods and services, the use tax is only charged under certain circumstances.

Here are some common instances where use tax is charged.

  • When a buyer purchases goods from an out-of-state seller who does not charge a sales tax.
  • If you're a professional and you buy goods for your trade in an area where sales tax doesn't apply but you plan to use those goods in an area where sales tax is charged, you might be responsible for paying a use tax.
  • If a buyer purchases items from a seller outside of their home jurisdiction and the seller doesn't charge sales tax, the use tax may be charged if the customer intends to use or store the goods in an area where sales tax is applicable.

Use tax is a complementary tax; it’s not charged if sales tax is charged. The use tax rate is typically the same as the local sales tax rate, but this also varies per state. It is left up to consumers to calculate and pay use taxes, which makes it challenging to enforce. However, a resident who does not pay use tax may be subject to fines, interest, and penalties.

Photo by Kelly Sikkema on Unsplash

Different Scenarios

Here’s an example to drive the concept home.

In California, sales tax applies to a range of items, including furniture, clothes, toys, vehicles, mobile homes, etc. If a Californian purchases clothing from a California-based retailer, the retailer will collect sales tax from the buyer at the point of sale and remit it to the tax authorities. However, if they buy any of these items in Oregon, where sales tax is not charged on the goods, and bring them back to California, they will be required to pay the use tax.

However, let’s say the buyer in California bought some groceries in Oregon and didn’t pay sales tax on that purchase. In this case, no use tax would be imposed because California doesn’t tax groceries. 

As previously mentioned, use tax also has it’s nuances per individual state or jurisdiction and if you’re faced with questions, it’s a great time to reach out to a sales tax consultant.

Two Classifications

Those who are familiar with use tax may commonly think of consumer use tax. As mentioned earlier, this is when a seller doesn't charge sales tax, and the consumer or buyer is responsible for paying the use tax. But to cover all the bases, let’s talk about another type of use tax known as the seller's use tax. 

Here’s the difference between consumer and seller use tax.

  • Consumer tax: If a seller has not collected the seller's use tax on tangible personal property that is brought into a state for storage, use, or consumption, the consumer is required to pay the consumer's use tax.
  • Seller Use Tax: Seller's use tax is levied on the retail sale of tangible personal property by businesses that are located outside of the state and have no inventory. However, if they are making retail sales through sales offices, agents, or they have nexus with another state, they are required to collect the seller's use tax. While this is often referred to as a sales tax, it is technically a seller's use tax that is collected.

It is important to understand the various tax types because the rates vary, and in some states there are separate returns due for each tax type. 

Even though enforcing use tax can be challenging, it’s best not to ignore it. 

To Wrap it Up 

Clearly, taxation takes on many forms. Use tax is one of the lesser-known types, even though it’s imposed on buyers by nearly every state. It is there to ensure that local vendors aren’t at a disadvantage. 

Similar to other aspects of sales tax, use tax doesn't have a universal solution. By delegating sales and use tax management to a specialist, you can cut down on the time, money, and stress involved in handling it yourself. Hop on a free “What’s Next Call” to get any more information you need regarding use tax!

Conclusion

In the intricate realm of taxation, "use tax" stands as a vital yet often misunderstood concept. This article demystifies its workings, shedding light on scenarios, classifications, and the imperative need for understanding. Whether a consumer navigating cross-border purchases or a business grappling with seller use tax, knowledge is the key to compliance. For comprehensive guidance on sales and use tax management, a "What’s Next Call" with our experts awaits, ensuring you tackle these complexities with confidence.
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