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use tax vs sales tax what businesses need to know

Sales tax and use tax are two sides of the same coin, and this article discusses use tax vs sales tax. They both collect revenue for the state and usually have the same tax rate. The main difference is who is responsible for making the payment to the state – the consumer or the seller.

Sales Tax vs Use Tax: Explained

There are plenty of similarities between sales tax and use tax, but there are also many subtle differences.

Sales Tax 

Unless you live in one of the four states without sales tax (Delaware, Montana, New Hampshire, and Oregon), you’re familiar with the sales tax line on your receipts.

A sales tax is a consumption tax on the sale of goods and services. For brick-and-mortar stores, sales tax charges at the point of sale. The tax is collected by the seller and then turned over to the government. 

Online businesses need to collect sales tax in a state if they meet the state’s threshold for business within the state. They can also be required to charge sales tax if they have a physical presence in the state.

Use Tax 

The use tax is basically just a type of sales tax. States impose a use tax on goods purchased and brought back outside a consumer’s jurisdiction that do not charge sales tax. 

For example, if you purchase items from a small online shop that isn’t required to collect sales tax in your state. You will need to determine what the sales tax would have been on the purchase and pay that as a use tax.

Differences and Similarities

There are some key differences between sales and use tax, but the two categories share some similarities.

Similarities Between Sales and Use Tax

The use tax is usually the same as the local/state sales tax. So your final cost will be the same whether you pay sales or use tax.

Differences Between Sales and Use Tax

The seller calculates sales tax. Consumers rarely verify the calculation of the sales tax by the store. However, consumers are responsible for calculating and remitting use tax to the government.

Use tax is difficult to regulate because it relies on consumers to self-report and pay. Taxpayers must also remember to add the use tax to their returns. Because the amounts are smaller, states rarely question the use tax calculations.

Are Sales & Use Taxes State or Federal?

Sales and use taxes are levied at the state or local level. California, for example, has state-, county-, and city-level sales tax. 

The rules regarding taxable purchases (food, clothing, etc.) are generally set at the state level. It’s only the tax rate on those purchases that varies by location.

Four states (Delaware, Montana, New Hampshire, and Oregon) don’t charge any sales tax.

If you are a retailer, it’s important to know which rates apply to your sales. You are responsible for remitting the tax, regardless of whether you pass it on to your customers. If you overcharge a customer for sales tax, you must also send any overpayment to the state.

There are stiff penalties for failing to meet your sales/use tax obligations. Penalty and interest charged on underpayment of these taxes are usually a percentage of the tax due. In addition, some states impose penalties for late filing of sales tax returns.

What is the Purpose of a Use Tax?

Before the proliferation of online retailers, local retailers captured almost every purchase. Local stores charged sales tax on purchases and sent the sales tax payments to the state.

At the beginning of online shopping, most online retailers didn’t sell in the state and were not required to charge sales tax on purchases. This left consumers responsible for paying the tax, which few people did.

Use tax is to help in-state businesses compete against out-of-state sellers that don’t have to collect sales taxes.

How are Use Taxes incurred?

There are several instances where you might incur use tax.

Use case incurs when you purchase items outside your home jurisdiction (usually outside your state), and the seller doesn’t charge a sales tax.

This is relevant when the customer intends to store or use goods in an area with a sales tax. For example, if you go to another state that does not charge sales tax and purchase a television. If the television comes back to your home and your state does charge sales tax, you would owe use tax on the purchase.

Use tax incurs when people make out-of-state purchases, and the seller also does not have sales tax.

This most often happens when goods are purchased online and shipped into the state.

Use tax incurs when a business makes purchases in another jurisdiction without sales tax.

This is relevant for professionals who buy goods for their line of work in a jurisdiction with no sales tax, but the goods will be used in a place where there is one.

Sales Tax vs Use Tax for eCommerce Businesses

Sales tax is a factor for virtually every eCommerce business, but use taxes only come into play in certain situations. Online entrepreneurs must ensure that they know all sales tax rules when selling in a new state. Some third-party platforms assist with sales tax, but most of the time, the burden is on the business owner.

Use tax affects businesses in a few ways. 

If you purchase equipment or goods for your business that is not subject to sales tax at the time of purchase but use the items in a jurisdiction with sales tax, you will need to pay use tax on the purchase.

Businesses cannot advertise their items as tax-free if they are subject to use tax for the purchaser.

Properly paying use tax means keeping thorough logs of all purchases made for the year, not subject to sales tax. In addition, businesses should keep a separate log of purchases made throughout the year that were not subject to sales tax. The IRS is much more likely to audit businesses rather than individuals for use tax, as sales tax audits include use tax reviews.

Final Thoughts

Just because use tax is easy to overlook doesn’t mean you should ignore it. Like any other tax, taxing authorities can audit you. If the state finds that you have been underpaying your use tax, you may be subject to penalties and interest.

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