Under most state laws, consumers must pay sales tax on goods and services they purchase. Typically, a seller collects the sales tax and remits it to state and local governments. But when an out-of-state retailer fails to collect sales tax, the burden shifts to consumers. They must calculate the amount owed on taxable items purchased, and then pay state and local governments directly. This tax is classified as a consumer use tax.
What is a use tax?
A use tax is a required contribution on goods and services that was not collected as sales tax at the time of purchase. If your local tax and fee administration charges sales tax as a percentage of a purchase price, that tax is owed regardless of whether a seller collects it. Practically, this means that if you buy a product from an out-of-state seller that does not collect tax, you must calculate your use tax rate and pay tax directly to state and local agencies.
Your local use tax rate will be the same as your local sales tax rate. Imagine you live in a region with a 5% local tax rate on retail purchases. If you order a $440 television online, the seller is supposed to add 5% to the sales price. If an online retailer chooses not to collect tax, the burden shifts to you as the buyer. You must calculate and remit any use tax on taxable goods. Because use tax rates align with sales tax rates, your tax liability would be $22.
What is the purpose of a use tax?
A use tax serves the same purpose as a sales tax or a value added tax (VAT). Use taxes fund state and local initiatives that include infrastructure, government administration, lending programs, and elder care. In some jurisdictions, sales and use taxes provide governments with their greatest source of revenue in a calendar year. Yet in states without a sales tax or a use tax, such as Montana and Oregon, government revenue must come from other sources such as property taxes, income taxes, and administrative fees.
When do you pay use tax?
Each state has its own laws governing when to pay use tax. Many allow residents to remit use tax once per calendar year. For instance, the California Department of Tax and Fee Administration (CDTFA) lets residents pay use taxes on April 15, the same as federal and state deadlines for filing income tax returns. The CDTFA also lets residents pay any tax owed each time they make a purchase. This may ease record-keeping burdens for some purchasers. You can check with your state’s department of taxation for laws specific to your region.
Learn the nexus conditions for each state
Shopify has a helpful sales tax reference page for learning the sales tax rates, collection rules, and nexus conditions for each state.See nexus conditions
Use tax vs. sales tax
Use tax and sales tax are two sides of the same coin. They are assessed at the same rates, and they fund the same programs. The difference is when and how the tax is collected.
What are the similarities?
Sales tax and use tax are assessed at the same rate. For instance, if a municipality has a 7.85% sales tax, it will also have a 7.85% use tax. Sales and use taxes also fund the same programs. And the two taxes apply to the same retail items. If a state levies sales tax on furniture but not groceries, it also levies use tax on furniture but not groceries. Both sales and use tax are only charged by the state in which the buyer resides. For instance, if a buyer in Idaho purchased a product from an online seller located in Oregon, the Oregon seller won’t charge sales tax because that state doesn’t have one. In this case, the Idaho-based buyer must pay use tax because their state does tax retail purchases.
What are the differences?
The difference in sales tax and use tax comes down to collection. Retailers collect sales tax and remit it to state and local governments. Purchasers remit use tax to governments. You only have to remit use tax in cases where there was no sales tax paid at the time of purchase of a taxable item. If you have already paid sales tax, you do not owe use tax.
Use tax FAQ
What is a use tax?
Use tax is a conditional tax that buyers must pay when sales tax is owed but was not collected. It applies in states and municipalities that levy sales tax on retail purchases. By law, a retailer is supposed to collect sales tax at the time of purchase. If the retailer does not do so, tax is still owed. The tax gets reclassified as a use tax, and the purchaser must remit it to the state or local government.
What is an example of a use tax?
To visualize how use tax works in the real world, imagine that a company operates in a state that charges a 6% sales tax. An online retailer didn’t collect sales tax on the company’s business-related purchases. To make up for this, the company must remit use tax directly to the state. The use tax will be 6% of the purchase price. However, if the online retailer added shipping charges, those are not subject to sales or use tax.
What’s the difference between sales and use tax?
Sales tax and use tax are effectively the same tax. They are assessed at the same rates and are owed on the same array of goods and services. The difference is that a seller collects and remits sales tax while a purchaser calculates and remits use tax.
Do I have to pay use tax on Amazon purchases?
No. Since 2017, Amazon has collected sales tax on purchases made in every state. Because your Amazon purchases come with sales tax added to the bill, there is no use tax owed (no additional tax owed) on Amazon orders.