What Is a Use Tax? Definition as Sales Tax, Purpose, and Example (2024)

What Is a Use Tax?

The term use tax refers to a conditional sales tax. The use tax is charged on any goods purchased without paying a sales tax when one would normally be applied in their home state. One of the most common instances of the use tax is when someone buys goods from another state where no sales tax is levied and the consumer intends to use, store, or distribute the goods where a sales tax would normally apply. The rate is generally the same as the local sales tax rate. It's up to consumers to calculate and pay use taxes, which makes it difficult to enforce.

Key Takeaways

  • The use tax is imposed on goods that are used, distributed, or stored in an area where sales tax is normally imposed but are purchased where no sales tax is collected.
  • The use tax is generally the same rate as the local/state sales tax.
  • Consumers are responsible for calculating and remitting the use tax to the government.
  • The purpose of the use tax is to protect in-state retailers against competition from out-of-state sellers that don't have to collect sales taxes.
  • The use tax is difficult to enforce because the onus lies on consumers to report and pay it.

Understanding Use Taxes

The use tax is a type of sales tax charged on certain goods. Unlike a sales tax, the use tax is only applied in certain circ*mstances rather than on all goods and services. The use tax is charged by a consumer's home municipality or state in any number of cases. Some of the most common ones include:

  • Whenever a consumer purchases items outside their home jurisdiction and the seller doesn't charge a sales tax. The use tax is charged if the customer intends to use or store the goods in an area where a sales tax is imposed.
  • When goods are purchased out-of-state and the seller doesn't charge a sales tax.
  • Professionals who purchase goods for their trade in a jurisdiction where there is no sales tax but will be used in an area where there is one.

The use tax rate is the same as the resident's local sales tax rate, which includes both state and local sales taxes. It is up to consumers to calculate and pay use taxes on any applicable purchases they make. A resident who does not pay use tax may be subject to interest and penalties.

For example, California residents must pay sales tax on things like furniture, gifts, toys, clothing, vehicles, mobile homes, and aircraft. If a Californian purchases clothing from a California retailer, the retailer will collect sales tax from the buyer at the point of sale and remit it to the tax authorities. No additional tax will be due. They would pay tax if they bring any of these goods back to California if they were purchased in Arizona, where no sales tax is charged.

Use Tax vs. Sales Tax

A use tax is ultimately the same as a sales tax. A sales tax is imposed by the government on the sale of goods and services. It is added to the purchase price at the point of sale, which means the seller collects it and remits it directly to the government.

Sales tax rates vary by jurisdiction. Some states charge a higher sales tax than others, while some don't charge any at all. Certain states don't impose a sales tax on certain items, such as food, clothing, and books. Others have a blanket tax on everything.

The use tax is usually the same rate as the local/state sales tax. The difference lies in how it's accounted for and who calculates it. The use tax is self-assessed and remitted by the end consumer, so if you make a purchase and are liable for your state's use tax, it's up to you to figure out how much you owe and pay it.

The use tax is generally more difficult to enforce than the sales tax and, in practice, is only applied to large purchases of tangible goods.

45

The number of states that impose a use tax. It is the same as the number of states with a sales tax.

Use Tax and Nexus

A nexus is generally defined as a physical presence, such as a sales office or warehouse. But this presence is not limited to these examples. In fact, you can have a nexus just by having an employee or an affiliate in a state or even a partner website that directs traffic to your webpage in exchange for a share of profits. So how does this relate to a use tax?

Retailers are usually not required to collect sales tax on purchases made by consumers in states where the retailer does not have a physical presence. As such, the onus falls on the consumer to calculate and remit the tax to his or her state government. Whether a business owes sales taxes to a particular government depends on the way that government defines nexus.

Tensions arising from the e-commerce industry's failure to pay sales taxes prompted the U.S. Supreme Court to rule in 2018 that physical presence is not necessary to create a substantial nexus, which can be sufficiently established by economic and virtual contacts. All states that charge sales tax have adopted remote sales tax laws covering e-commerce sellers.

Purpose of Use Tax

The purpose of the use tax is supposed to protect in-state retailers against unfair competition from out-of-state sellers that aren't required to collect tax. It also ensures that all of a state's residents help fund state and local programs and services, regardless of where they shop. Similar laws apply in most states, not just California.

As noted above, it is often difficult to enforce. That's because it's up to consumers to report and pay the use tax. This means governments end up losing a chunk of revenue to goods purchased in areas where no sales tax is collected, which is why states require online vendors to collect taxes whenever their customers make purchases.

Example of Use Tax

Let's say that a Californian bought clothing from an online retailer in Oregon. Under Oregon law, the retailer does not collect sales tax on the goods but the retail buyer must still pay a use tax on that clothing purchase to the California tax authority called the Board of Equalization.

On the other hand, if the Californian purchased groceries in Oregon and did not pay any sales tax on the purchase, generally no use tax would be due because the state of California does not tax the majority of groceries.

What Does the Use Tax Mean?

The use tax is a type of sales tax. It is imposed on goods purchased where no sales tax is charged outside a consumer's jurisdiction and brought back home. The rate is generally the same.

What's the Difference Between the Use Tax and the Sales Tax?

A sales and use tax are ultimately the same thing. They are both applied to goods and services. The difference lies in how they're calculated and who pays them. While a sales tax is applied at the time a purchase is made and is collected and remitted to the government by the seller, a use tax is calculated and paid by the consumer or end user. The rate, however, is generally the same as the local/state sales tax.

How Much Is the Use Tax in California?

The use tax rate in California is 7.25%, which is the same as the sales tax applied across the state, as of 2024. Some cities and counties have additional sales taxes.

The Bottom Line

Taxation comes in many forms. But many people aren't aware of the use tax, which almost all states impose on consumers. The use tax is a form of sales tax that you must pay for goods and services you intend to use in a state where you'd normally pay sales tax and purchase anywhere else where they aren't required to collect sales tax. The government does this to ensure that local sellers aren't at a disadvantage. But it can be hard to enforce because many consumers don't report or pay their use taxes. Failure to pay use taxes can result in fines or penalties. You can consult your state's tax department to find out more about how to pay any use taxes you may owe.

What Is a Use Tax? Definition as Sales Tax, Purpose, and Example (2024)

FAQs

What Is a Use Tax? Definition as Sales Tax, Purpose, and Example? ›

Use tax is a tax that is imposed on the use, storage, or consumption of goods and services that were purchased without paying sales tax. It is typically imposed by the state or local government where the goods or services are used, and the rate is often the same as the sales tax rate.

What is the difference between sales tax and use tax in US? ›

In conclusion, both sales tax and use tax are types of taxes that are levied on different transactions. Sales tax is typically charged at the point of sale on goods and services, while use tax is usually charged on items that were purchased outside of the state but are used within the state.

What type of tax is a sales tax explain your answer? ›

Sales taxes are a form of consumption tax. levied on retail sales of goods and services. If you live in the U.S., you are likely familiar with the sales tax from having seen it printed at the bottom of store receipts.

What are taxes used for definition? ›

Required payments of money to governments that are used to provide public goods and services for the benefit of the community as a whole.

What are the differences between a sales tax in a used tax quizlet? ›

A sales tax is on the purchase of goods and services at the point of sale while a use tax is paid on goods and services purchased when sales tax was not paid.

Is use tax deductible on federal returns? ›

On your tax return, you can deduct the state and local general sales tax you paid during the year, or you can deduct the state and local income tax you paid during the year. You can't do both.

How do I know if I owe use tax in California? ›

You owe use tax on any item purchased for use in a trade or business and you are not registered, or required to be registered with the CDTFA to report sales or use tax. You owe use tax on purchases of individual items with a purchase price of $1,000 or more each.

Which is an example of a sales tax? ›

When calculating the sales tax on a taxable item, the cost of the item is multiplied by the tax rate. To further illustrate, consider the following example: In a state where the sales tax rate is six percent, the sales tax on a $10 book is 60 cents. The cost of the book to the consumer, after tax, is $10.60.

Which best describes sales tax? ›

There is no one definitive sales tax definition, but generally… Sales Tax is defined as a tax on the sale, transfer, or exchange of a taxable item or service. Sales tax generally applies on the sale to the end user or ultimate consumer. Sales tax is generally added to the sales price and is charged to the purchaser.

How to use sales tax in a sentence? ›

Examples from Collins dictionaries

A 6% sales tax on complimentary hotel rooms began this month. A restaurant must charge a sales tax on the meals it sells. There is a 14% sales tax as well as room occupancy tax on each stay.

Why is it called use tax? ›

The use tax is imposed on goods that are used, distributed, or stored in an area where sales tax is normally imposed but are purchased where no sales tax is collected.

Why do I have to pay taxes instead of getting a refund? ›

And it's even more painful if you were expecting to get a tax refund. But at the end of the day, a tax bill boils down to simple math: You owe more taxes than you paid throughout the year. That usually means you didn't have enough money withheld from your paycheck to cover taxes. Bummer.

What do you use taxes for? ›

Income security refers to federal spending on safety net programs to increase the health and safety of the general population. Programs included under, but not limited to this umbrella term, are housing assistance, nutrition and food assistance, unemployment compensation, foster care, and certain tax credits.

What are the differences between a sales tax and a use tax ?( 1 point responses? ›

Correct Answer:

C) A sales tax is on the purchase of goods and services at the point of sale while a use tax is paid on goods and services purchased when sales tax was not paid.

Who is most likely to be harmed by increasing property taxes? ›

The group that is most likely to be harmed by increasing property taxes is low-income individuals. When property taxes increase, the cost of living in a particular area also goes up. This can make it difficult for low-income individuals and families to afford their homes or find affordable housing in the area.

What 2 types of sales tax do most states have? ›

Forty-five states impose state-level sales taxes, while consumers also face local sales taxes in 38 states, including Alaska, which does not impose a statewide tax.

Is Texas use tax the same as sales tax? ›

Use tax is a nonrecurring tax that is complementary to sales tax and is imposed on the storage, use, or other consumption of tangible personal property or a taxable service in Texas.

Why are there 3 different sales tax rates in states across the US? ›

Many states allow cities, counties, and other localities to impose their own sales taxes on top of the state rate. For example, while the state sales tax in California is 7.25%, local rates in some cities push the total tax rate to 9.25% and over.

Why do some states have no sales tax? ›

Because things like sales taxes are a state function. Most state legislatures have chosen to do that, but a handful have not. This is probably because they're taxing other things at a rate sufficient to generate the revenue they need, but there could be other reasons that are unique to each state that doesn't.

Why is there sales tax in USA? ›

Retail sales taxes are an essential part of most states' revenue toolkits, responsible for 32 percent of state tax collections and 13 percent of local tax collections (24 percent of combined collections). They also benefit from being more pro-growth than the other major state tax, the individual income tax.

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