Sales Tax vs Use Tax: What Every Consumer Should Know

Most consumers are familiar with sales tax—the tax added to purchases at the point of sale. However, fewer people understand use tax, its less-known counterpart that applies to purchases made out of state. Understanding the difference between sales tax and use tax is crucial for tax compliance and avoiding unexpected tax bills. Both taxes serve the same purpose—taxing consumption—but they apply in different situations and are collected differently.

Calculate your sales tax obligation with our Sales Tax Calculator to ensure accurate tax planning.

What Is Sales Tax?

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. It's collected by the seller at the point of sale and then remitted to the appropriate tax authorities. When you buy an item in a store, you see the sales tax added to your receipt, and the retailer handles paying that tax to the government.

Sales tax rates vary by state and locality, typically ranging from 0% to over 10% depending on where the purchase occurs. The tax is calculated as a percentage of the purchase price and is added to the total amount you pay. For example, if you buy a $100 item in a location with an 8% sales tax rate, you'll pay $108 total—$100 for the item and $8 in sales tax.

The key characteristic of sales tax is that it's collected at the time of purchase by the seller. This makes it visible and easy to track, which is why most consumers are familiar with it. Retailers are responsible for collecting and remitting sales tax, making compliance relatively straightforward for buyers.

What Is Use Tax?

Use tax is a complementary tax designed to tax the use, storage, or consumption of goods and services purchased without paying sales tax. It applies when you buy items from out-of-state sellers who don't collect sales tax, or when you purchase items in a state without sales tax but use them in a state that does have sales tax.

Unlike sales tax, use tax is typically self-reported and paid directly by the consumer to the state tax authority. The rate is usually the same as the sales tax rate in your state, ensuring that purchases are taxed at the same rate whether you buy locally or from out of state.

Use tax prevents consumers from avoiding sales tax by purchasing items from out-of-state sellers. Without use tax, people could simply buy everything from states with no sales tax or from online retailers not collecting tax, undermining the state's ability to tax consumption.

When Use Tax Applies

Use tax typically applies in several situations. Most commonly, it applies to online purchases from out-of-state retailers who don't collect sales tax. Before the Supreme Court's Wayfair decision in 2018, many online retailers didn't collect sales tax, making consumers responsible for paying use tax on these purchases.

Use tax also applies when you purchase items in a state without sales tax but use them in a state that does have sales tax. For example, if you buy a car in Oregon (no sales tax) but register it in Washington (which has sales tax), you may owe use tax in Washington.

Additionally, use tax applies to items purchased for business use that were exempt from sales tax at purchase but are later used in a way that would have been taxable. Businesses must track these purchases and remit use tax accordingly.

The Wayfair Decision and Its Impact

The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally changed how sales tax applies to online purchases. Previously, retailers were only required to collect sales tax if they had a physical presence (nexus) in the buyer's state. This allowed many online retailers to avoid collecting sales tax.

The Wayfair decision allows states to require online retailers to collect sales tax based on economic nexus—meaning if they sell a certain amount or number of transactions in a state, they must collect sales tax. This has significantly increased sales tax collection on online purchases.

However, use tax still applies in situations where online retailers don't collect sales tax—either because they don't meet the nexus threshold or because they're not required to collect tax for other reasons. In these cases, consumers remain responsible for paying use tax.

Compliance and Reporting

Complying with use tax requirements can be challenging because it's self-reported. Many consumers are unaware of their use tax obligations, leading to widespread non-compliance. States have struggled to enforce use tax collection, though some have improved reporting mechanisms.

Some states include use tax reporting on their income tax returns, making it easier for consumers to report and pay use tax. Other states have separate use tax reporting forms or online portals. However, compliance rates remain relatively low compared to sales tax compliance.

For businesses, use tax compliance is more critical. Businesses are more likely to be audited and face penalties for non-compliance. Many businesses use tax software or consult with tax professionals to ensure proper use tax reporting and payment.

Penalties for Non-Compliance

Failing to pay use tax when required can result in penalties and interest charges. While individual consumers are rarely audited for use tax, businesses face higher scrutiny. Penalties can include interest on unpaid amounts, late payment penalties, and in some cases, criminal penalties for willful non-compliance.

The likelihood of enforcement varies by state. Some states are more aggressive about use tax enforcement, particularly for businesses and high-value purchases. States may also use various methods to identify non-compliance, including reviewing vehicle registrations, business purchases, and other records.

Practical Examples

Consider buying a $1,000 laptop online from an out-of-state retailer that doesn't collect sales tax. If your state has an 8% sales tax rate, you would owe $80 in use tax on that purchase. This tax should be reported and paid to your state tax authority.

If you purchase a $30,000 vehicle in Oregon (no sales tax) but register it in Washington (which has sales tax), you would owe use tax to Washington based on Washington's tax rate. This ensures the vehicle is taxed appropriately even though it was purchased tax-free.

For businesses, if you purchase office equipment from an out-of-state vendor that doesn't collect sales tax, you may owe use tax on that equipment. This applies even if the purchase was for business use and might have been exempt from sales tax if bought locally.

How to Calculate Use Tax

Calculating use tax is straightforward—it uses the same rate as sales tax in your state. Simply multiply the purchase price by your state's sales tax rate. Our Sales Tax Calculator can help you determine the exact amount you owe.

The challenge isn't the calculation but rather tracking purchases that require use tax. Keep receipts for out-of-state purchases, online purchases from retailers not collecting sales tax, and major purchases made in tax-free states but used in states with sales tax.

The Bottom Line

Sales tax and use tax serve the same purpose—taxing consumption—but apply in different situations. Sales tax is collected at the point of sale by retailers, while use tax is self-reported by consumers for purchases made without paying sales tax. Understanding when use tax applies helps ensure tax compliance and avoid penalties.

With the Wayfair decision, more online retailers now collect sales tax, reducing the need for consumers to pay use tax on many purchases. However, use tax still applies in various situations, particularly for business purchases and purchases from smaller online retailers.

Stay informed about your state's use tax requirements, keep records of out-of-state purchases, and use our Sales Tax Calculator to determine accurate tax amounts. Proper compliance ensures you're meeting your tax obligations while avoiding penalties and interest charges.

Frequently Asked Questions

Do I need to pay use tax on all online purchases? No, most online retailers now collect sales tax following the Wayfair decision. Use tax typically applies only when sales tax wasn't collected.

How do I pay use tax? Many states include use tax reporting on income tax returns. You can also use separate forms or online portals provided by your state tax authority.

Will I be penalized for not paying use tax? While enforcement varies, you may face penalties and interest if audited. Businesses face higher scrutiny than individual consumers.

Is use tax the same rate as sales tax? Yes, use tax rates are typically the same as sales tax rates in your state, ensuring consistent taxation regardless of where purchases are made.

Citations

• Tax Foundation. "Use Tax: An Overview." Tax Foundation Research.
• U.S. Supreme Court. "South Dakota v. Wayfair, Inc." 2018.
• National Conference of State Legislatures. "State Use Tax Reporting Requirements." NCSL.org.