You are probably familiar with the term sales tax. After all, most states impose a sales tax on the goods consumers purchase every day. Use tax is a little less known, but it’s still important to understand, especially if you sell goods online. eCommerce businesses may be subject to both sales and use tax, so it is important to make sure you understand the difference between sales and use tax and how to properly calculate, collect, and remit both.
The Difference Between Sales and Use Tax
Tax authorities typically impose sales and use tax on any goods sold. There are only five states in the U.S. that don’t charge a sales or use tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon. However, state laws give municipalities the option to levy taxes locally, and many jurisdictions choose to impose their own taxes.
- Governments impose sales taxes on any goods sold within the state or to state residents. Some localities impose an additional tax on top of the statewide sales tax. For example, California has a 7.25% statewide tax, and the city of Los Angeles charges another 2.25% on top of that. If you buy goods in Los Angeles, you will pay a total markup of 9.5%. To learn more about sales taxes, check out our in-depth sales tax guide.
- Use tax is also levied on goods. However, it only applies to out-of-state purchases where no sales tax was collected. For example; a California resident purchases goods in Oregon and pays no sales tax. If the resident consumes or stores the product in California, the state imposes a use tax to make up for the lost revenue. States typically charge use taxes at the same rate as the sales tax.
Who Pays Sales and Use Taxes?
States have different models for imposing and collecting sales and use taxes. Some states have a seller privilege policy, and others have a consumer tax policy.
- In seller privilege tax states, the seller must pay sales taxes. The state holds sellers responsible for the tax, regardless of whether they collect it from their customers. The tax doesn’t pass onto the buyer, so sellers don’t have to list it separately on the invoices. In the event of an audit, the state only collects taxes from the seller.
- In consumer tax states, the seller must collect the sales tax from the buyer. As opposed to the seller privilege system, sellers only have to collect the sales tax and remit sales tax. In the event of an audit, the state can collect tax from either seller or buyer. Most states use consumer tax States.
As you can see, both buyers and sellers are responsible for paying sales tax depending on how your state is structured. As an online seller, it is important to know how each state and locality you conduct business in handles sales and use tax. Since state and local taxes vary, working with a SALT (state and local tax) specialist is a smart choice.
Tips for Calculating and Remitting Sales and Use Tax
Sales and use tax rates can vary from state to state and locality to locality, so one of the most important tips we can offer to online sellers is to know where you have Nexus. Nexus can be defined as having a physical or economic presence in a state or locality.
This could be having an office location, inventory location, an affiliate or employee location, or having a significant amount of sales in a particular location.
You should also know if you live in an origin-based sales tax state or a destination-based sales tax state.
- Origin-based sales taxes impose taxes depending on where the business is based.
- States impose a destination-based sales tax depending on where the buyer is located.
The Best Way to Manage Your Taxes
Accounting software like Quickbooks or Xero can help you manage your sales and use tax responsibilities. However, software can’t replace a knowledgeable accountant who specializes in State and Local Tax.
The eCommerce accounting team at TaxHack specializes in sales and use tax for online businesses. We can help you save money and stay compliant so you can focus more on running your business. Signup for a friendly chat with one of our tax pros today. We’re happy to answer your questions.