Most people are used to seeing sales tax on a receipt, but not every purchase includes it. When it doesn’t, you may still owe tax on that purchase through what’s called a use tax. This comes up most often with online shopping, out-of-state purchases and private sales. Understanding the difference between sales tax and use tax can help you avoid surprises when your state comes looking for what you owe.
A financial advisor or tax professional can review your purchases and filing history to make sure you are reporting use tax correctly and not overpaying or underpaying.
What Is Sales Tax?
Sales tax is a consumption tax that state and local governments impose on the sale of goods and certain services. The seller typically collects it at the time of purchase and then remits it to the appropriate taxing authority. The rate you pay depends on where the transaction takes place. This is because states, counties and cities can all levy their own taxes. As a result, sales tax rates can vary widely, even within the same state.
Although businesses are responsible for collecting sales tax, the cost is ultimately borne by consumers. Retailers act as intermediaries, adding the tax to the purchase price and passing it along to the government.
Not all purchases are taxable, however. Many states exempt taxes on items like groceries, prescription drugs or certain services. These exemptions help reduce the tax burden on essential spending.
What Is Use Tax?
Use tax is a consumption tax that applies when retailers do not collect sales tax at the time of purchase. It helps ensure states still receive tax revenue when you buy taxable goods or services without sales tax. This often applies to out-of-state or online sellers.
In practice, use tax mirrors the sales tax rate that would otherwise apply for local purchases. Together, sales tax and use tax help create a level playing field for both in-state and out-of-state sellers.
Use tax typically applies when you buy a taxable item from a seller that doesn’t collect sales tax and then use, store or consume that item in your home state. Common examples include online purchases, catalog orders or big-ticket items bought in another state and brought home. Even though the tax obligation exists at the time of purchase, you may not be aware of it because you do not pay it at checkout. That lack of visibility often leads to confusion or noncompliance.
Unlike sales tax, you usually pay use tax directly as the buyer rather than the seller collecting it. Individuals may report it on their state income tax return. You may also or through a separate use tax filing, depending on state rules.
Differences Between Sales and Use Tax
Sales tax and use tax are closely related but apply in different situations, and you pay them in different ways. Understanding how they differ can help consumers and businesses stay compliant and avoid unexpected tax bills.
When the Tax Is Triggered
Sales tax applies when you buy a taxable item from a seller required to collect it. Use tax applies after purchase when the retailer does not collect sales tax and you use, store or consume the item in your state.
The timing difference is one of the clearest distinctions between the two.
Who Collects the Tax
Sales tax is collected by the seller and added directly to the purchase price. The seller then remits that tax to the state or local government.
Use tax, on the other hand, is usually not collected by the seller. Therefore, the buyer must pay it directly.
Who Is Responsible for Payment
With sales tax, the consumer pays the tax indirectly through the retailer at checkout. With use tax, the responsibility falls squarely on the consumer or business to calculate and report the tax themselves. This difference is why many often miss or misunderstand the use tax.
In the end, sales tax and use tax are two sides of the same coin. Both ensure states collect tax revenue on taxable purchases. The main difference lies in whether the retailer collects tax at checkout or the buyer reports it later.
Knowing how each works can help you better understand your obligations and avoid surprises at tax time.
How to Report on Both Sales and Use Tax
For most consumers, sales tax reporting happens automatically at checkout. The retailer calculates the tax based on applicable state and local rates and adds it to the total purchase price. Because the seller is responsible for remitting the tax, buyers generally don’t need to take any additional action. However, keeping receipts can still be helpful for budgeting and record-keeping.
Use tax reporting is more hands-on, but it is often a commonly overlooked tax mistake. Many states include a dedicated line on the state income tax return where individuals can report use tax owed for the year. Some states allow you to estimate use tax based on income if you didn’t track individual purchases. Others may be more stringent, requiring you to calculate it purchase by purchase.
Filing accurately can help you avoid penalties and interest.
Frequently Asked Questions (FAQs)
What Is the Difference Between Sales and Use Tax?
Sales tax and use tax serve the same purpose but apply at different points in a transaction. You pay sales tax to the seller at the time of purchase when you buy a taxable item from a retailer required to collect it. Meanwhile, use tax applies when the sales tax is not charged and you later use, store or consume the item in your home state. In other words, you pay sales tax automatically at checkout, while the buyer self-reports use tax.
Who Pays Sales Tax?
The consumer ultimately pays sales tax, even though the seller collects and remits it. When you make a taxable purchase, the retailer adds the sales tax to the purchase price. They then send that amount to the state or local taxing authority. Businesses act as intermediaries in this process but don’t typically bear the cost themselves. From the buyer’s perspective, sales tax is simply part of the transaction’s total cost.
Who Pays Use Tax?
The buyer pays use tax directly when the seller does not collect sales tax at the time of purchase. This responsibility usually falls on the individual or business that uses, stores or consumes the taxable item in the state. Unlike sales tax, no retailer collects it at checkout, so the buyer must calculate and report the tax themselves. As a result, use tax is easy to overlook, but you still must legally pay it.
Bottom Line
Sales tax and use tax do the same thing but show up in different situations. Sales tax gets added at checkout by the retailer. Use tax applies when that doesn’t happen and the buyer is responsible for reporting it. Knowing how both work helps you avoid unexpected tax bills and stay on the right side of state rules.
Tax Planning Tips
- A financial advisor who specializes in tax planning can review your out-of-state and online purchases to flag anything that needs use tax reporting. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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