Use Tax: Definition, Purpose, and How It Differs from Sales Tax

Use tax is a consumption tax applied to goods purchased outside your home taxing jurisdiction when no sales tax was collected at the point of sale. It ensures that residents pay the same tax whether they buy locally or from out-of-state sellers, preserving fair competition and funding state and local services. Unlike sales tax, use tax is typically self-assessed by the buyer.

Key takeaways

• Use tax applies when no sales tax was collected on a purchase that will be used, stored, or consumed in your home jurisdiction.
• Rates usually match the local/state sales tax rate; the consumer is responsible for calculating and remitting use tax.
• Use tax protects in-state retailers and helps ensure residents contribute to local revenue.
• Enforcement is challenging because payment depends on consumer self-reporting; failure to pay can result in interest and penalties.

What is use tax?

Use tax is effectively the counterpart to sales tax. If you buy tangible goods outside your taxing jurisdiction—and the seller did not collect sales tax—you may owe use tax to your home state or local government. The tax is designed to capture revenue on out-of-state purchases and prevent an unfair price advantage for sellers who don’t collect tax.

How use tax works

Common situations that trigger use tax:
* Buying goods from an out-of-state retailer that did not charge sales tax.
* Purchasing items in a state or locality that doesn’t tax certain goods (for example, some states exempt groceries or clothing).
* Acquiring supplies or equipment for business use in your state from a seller that didn’t collect sales tax.

Practical points:
* The use tax rate generally equals the combined state and local sales tax rate where the item will be used.
* Consumers (or businesses) calculate and remit use tax, commonly when filing state income tax returns or on a separate use tax return.
* Governments may target large or high-value purchases for enforcement, but casual purchases are harder to police.

Use tax vs. sales tax

Sales tax: Collected by the seller at the point of sale and remitted to the government.
Use tax: Self-assessed by the buyer when sales tax wasn’t collected.
Both taxes typically use the same rate; the main difference is who collects and remits the tax.

Nexus and remote sales

Whether a seller must collect sales tax depends on whether it has “nexus” (a sufficient connection) with the taxing state. Nexus can be physical (store, warehouse, employee) or economic/virtual (sales volume or transaction thresholds). A key development: the U.S. Supreme Court’s South Dakota v. Wayfair decision established that physical presence is not required to create nexus, enabling states to require many remote (e-commerce) sellers to collect sales tax. When a remote seller collects sales tax, no use tax is due by the buyer on that purchase.

Why use tax exists

Use tax prevents out-of-state sellers or untaxed purchases from undermining local businesses and ensures residents contribute to state and local services regardless of where they shop. It levels the playing field between local and remote sellers.

Example

A resident of State A buys clothing from an online retailer in State B that doesn’t collect sales tax. If State A taxes clothing, the resident owes use tax to State A equal to the local sales tax rate. If the retailer is required to collect sales tax in State A (because of nexus), the retailer would collect and remit the tax and the buyer would not owe additional use tax.

Enforcement and penalties

Because use tax depends on self-reporting, enforcement varies. States may:
* Require taxpayers to report use tax on income or sales tax returns.
* Audit taxpayers and assess back taxes, interest, and penalties for unpaid use tax.
* Require businesses to file and remit use tax periodically.

Penalties and interest apply for late or unpaid use tax; amounts and enforcement practices differ by state.

How to report and pay use tax

• Check your state’s tax authority website for instructions and forms.
• Many states provide a checkbox or line on individual income tax returns to report use tax for consumer purchases.
• Businesses typically report and remit use tax via sales/use tax returns filed periodically.
• Keep receipts and records of purchases to support reported amounts.

Frequently asked questions

Q: Who is responsible for paying use tax?
A: The purchaser (consumer or business) is responsible when sales tax was not collected by the seller.

Q: If an out-of-state seller charges sales tax, do I still owe use tax?
A: No. If the seller collects and remits the correct tax for your jurisdiction, you do not owe additional use tax.

Q: Are all items subject to use tax?
A: Subject to state rules. Some jurisdictions exempt specific items (e.g., groceries, prescription medicines, or clothing).

Q: What changed after Wayfair?
A: States can require remote sellers without physical presence to collect sales tax if the seller meets economic thresholds, reducing the number of transactions that rely on consumer-paid use tax.

Bottom line

Use tax complements sales tax by capturing tax on out-of-state purchases when the seller does not collect sales tax. It preserves fairness for local sellers and funds public services, but relies heavily on buyer compliance. Check your state tax agency for specific rules, rates, reporting methods, and exemptions.

Sources: state departments of revenue, state tax agencies, and U.S. Supreme Court decision South Dakota v. Wayfair.