Use tax is a tax on taxable purchases when sales tax wasn't collected at the time of purchase. It most commonly applies to online purchases, out-of-state purchases, or purchases from remote sellers that do not charge your state's sales tax.
The purpose of use tax is to ensure that taxable goods are subject to the same tax whether they're purchased locally or from a seller outside your state.
In most cases, the use tax rate is the same as the sales tax rate that would have applied if the item had been purchased within your state.
How Use Tax Works
When you buy a taxable item from a local retailer, the seller typically collects sales tax and sends it to the appropriate state or local tax authority.
However, if sales tax isn't collected, the responsibility may shift to the purchaser. In that situation, you may be required to calculate and pay use tax yourself.
Use tax helps states collect tax revenue on purchases that would otherwise escape taxation simply because the seller did not charge sales tax.
When Use Tax Applies
You may owe use tax if all of the following are true:
- You purchased taxable goods online, from an out-of-state retailer, or from another remote seller.
- The seller did not collect your state's sales tax.
- You use, store, or consume the item in your state.
If sales tax was already collected at the correct rate, you generally do not owe use tax.
Common Situations That Trigger Use Tax
Use tax often applies in situations such as:
- Purchasing a laptop from an out-of-state retailer that doesn't collect your state's sales tax
- Buying furniture online without sales tax being charged
- Ordering merchandise from a remote seller that lacks tax collection obligations in your state
- Bringing taxable items home from another state or another country
- Purchasing equipment, electronics, or supplies for personal use when no sales tax was paid
Although many large online retailers now collect sales tax automatically, use tax obligations can still arise in certain situations.
Use Tax vs. Sales Tax
Sales tax and use tax are closely related and typically apply at the same rate.
Sales Tax
- Collected by the seller at the time of purchase
- Paid directly as part of the transaction
- Remitted by the seller to the tax authority
Use Tax
- Reported and paid by the purchaser
- Applies when sales tax was not collected
- Ensures the proper tax is paid on taxable purchases
The primary difference is who is responsible for remitting the tax.
How to Report and Pay Use Tax
Each state has its own reporting requirements.
Common methods include:
- Reporting use tax on a state income tax return
- Filing a separate use tax return with the state tax agency
- Remitting payment directly through a state tax portal
Some states also provide optional use tax lookup tables that estimate use tax based on income when exact purchase records are unavailable.
Because requirements vary by state, taxpayers should follow the instructions provided by their state's tax authority.
Records to Keep
If you may owe use tax, it's important to maintain records of your purchases.
Helpful records include:
- Purchase receipts
- Order confirmations
- Purchase dates
- Purchase prices
- Shipping documentation
- Records showing any sales tax already paid
Keeping good records can make it easier to calculate use tax accurately and respond to questions from a state tax authority if needed.
Example of a Use Tax Calculation
Suppose you purchase a camera from an out-of-state seller.
Purchase details:
- Purchase price: $1,000
- Sales tax collected by seller: $0
- State use tax rate: 6%
Calculation:
$1,000 × 6% = $60
In this example, the purchaser would owe $60 in use tax.
The tax would typically be reported on the applicable state tax return or paid directly to the state, depending on local requirements.
What Purchases Are Usually Subject to Use Tax?
Use tax most often applies to tangible personal property, including:
- Electronics
- Furniture
- Appliances
- Clothing
- Tools and equipment
- Household goods
Whether a purchase is taxable depends on state law. If an item would normally be subject to sales tax when purchased locally, it will generally be subject to use tax if sales tax wasn't collected.
What Happens If Use Tax Isn't Reported?
States may assess:
- Additional tax
- Interest charges
- Penalties
Many states receive purchasing information from retailers and online marketplaces, making it easier to identify purchases for which sales or use tax may be due.
For that reason, it's important to report and pay any required use tax when filing your state tax return.
Why Use Tax Matters
Use tax creates fairness between local businesses and remote sellers by helping ensure that similar purchases receive similar tax treatment.
Without use tax, a purchaser could potentially avoid tax simply by buying from a seller that does not collect sales tax. State use tax laws help prevent that outcome and maintain consistent taxation of taxable goods.