Key Takeaways
- Tax on use when no sales tax was paid.
- Ensures equal taxation for in-state purchases.
- Buyer self-reports and pays the tax.
- Protects local businesses from out-of-state competition.
What is Use Tax?
Use tax is a state and local tax imposed on the use, storage, or consumption of tangible goods and certain services when sales tax was not paid at purchase. It ensures that items bought out-of-state or online are taxed similarly to in-state purchases, maintaining fairness in tax collection.
This tax complements the sales tax system by preventing revenue loss from untaxed purchases and supporting government funding.
Key Characteristics
Use tax shares similarities with sales tax but has distinct features you should know.
- Applicability: Applies when no or insufficient sales tax was collected at the point of purchase.
- Taxpayer Responsibility: The buyer, not the seller, usually self-assesses and remits use tax.
- Rate: Generally matches the state's sales tax rate, such as in California.
- Purpose: Protects local businesses and state revenue by discouraging purchases that avoid local taxes.
- Reporting: Often declared annually through tax returns or dedicated state portals.
How It Works
When you purchase an item without paying sales tax, you calculate use tax based on the purchase price and remit it to your state government. This process is usually done via your annual income tax filing or through specific state tax websites.
Businesses track use tax on taxable items acquired tax-free but used internally, ensuring compliance and avoiding penalties. Many states align use tax rates and exemptions with their sales tax rules to simplify administration.
Examples and Use Cases
Use tax applies in various scenarios where sales tax collection is absent or incomplete.
- Out-of-State Purchases: Buying a laptop online from an out-of-state seller without nexus requires paying use tax upon bringing it into your state.
- Business Equipment: A company that buys office furniture tax-free but uses it in its operations owes use tax, similar to how Delta accounts for expenses in its financials.
- Travel Purchases: Items bought in states without sales tax, like Oregon, may incur use tax when used in states with tax, such as California.
Important Considerations
Compliance with use tax laws is essential to avoid interest and penalties, which states enforce through audits and self-reporting requirements. Many individuals overlook small taxable purchases, but businesses often maintain detailed records to ensure accurate reporting.
Understanding exemptions and consulting resources like the best credit cards for managing purchases can help you stay tax compliant and optimize your transactions.
Final Words
Use tax ensures fair taxation regardless of where you buy taxable goods or services. Review your recent purchases for any unpaid use tax and report it accordingly to stay compliant and avoid penalties.
Frequently Asked Questions
Use tax is a tax imposed by state and local governments on the use, storage, consumption, or enjoyment of tangible personal property or taxable services when no sales tax or insufficient sales tax was paid at purchase.
Sales tax is collected by the seller at the point of sale within a state, while use tax is self-assessed and paid by the buyer when sales tax was not collected, such as on out-of-state or online purchases.
Use tax exists to prevent tax evasion, protect local businesses, and ensure fair taxation by taxing purchases made outside the state that are used within the state, helping fund public services.
You owe use tax when you buy taxable goods or services without paying enough sales tax at purchase, such as from out-of-state sellers without tax collection responsibilities, and then use those items in your state.
The buyer, whether an individual or business, is responsible for self-reporting and remitting use tax to their state when sales tax was not collected or was insufficient.
Use tax is generally imposed at the same rate as the sales tax rate of the state or local jurisdiction where the item is used or consumed.
Yes, the 2018 Wayfair decision led many states to require out-of-state sellers with significant sales or transactions to collect sales tax, reducing but not fully eliminating the need for buyers to pay use tax.
If you buy a $1,000 laptop online from an out-of-state seller who doesn't charge sales tax in your 7% sales tax state, you owe $70 in use tax when you first use the laptop in your state.
