Sales Tax vs Use Tax
· USDataDesk
Sales tax and use tax are designed to work as a matched pair, so that a taxable purchase is taxed once, at your local rate, no matter where or how you bought it. Most people have never heard of use tax, but it has been on the books in every sales-tax state for decades.
Sales tax
Charged by the seller at the point of sale, added as a line on your receipt, and remitted by the seller to the state. It applies whenever the seller has a tax collection obligation (“nexus”) in the state where the sale is sourced — historically a physical presence, and since 2018 also an economic presence (see below).
Use tax
Owed by the buyer when a taxable item is used, stored, or consumed in a state that would have taxed the sale, but no sales tax was collected. The rate is the same as the buyer’s local combined sales tax rate. The common triggers:
- Buying from an out-of-state seller that does not collect your state’s tax (typically a smaller seller below the economic-nexus threshold).
- Buying in a no-sales-tax state — Oregon, Montana, New Hampshire, Delaware — and bringing the goods home to a state that taxes them.
- A business taking items out of its resale inventory for its own use (office supplies, equipment, promotional giveaways), on which it originally paid no tax because it bought them for resale.
- Buying something for use in State A but taking delivery in State B at a lower rate — you may owe the difference to State A.
Why it exists
Without use tax, the sales tax would collapse: everyone would buy cars, electronics, furniture, and business equipment across a state line or from a non-collecting seller to avoid the tax, and in-state retailers could not compete. Use tax makes the system neutral to where you shop — the state gets its revenue and local businesses are not undercut purely on tax.
Who actually pays it
| Payer | In practice |
|---|---|
| Businesses | Routinely. Use tax self-assessment is a standard part of accounting and a top item in a state sales-tax audit. Underpaid use tax on purchases is one of the most common audit findings. |
| Individuals | Rarely, and mostly voluntarily. Many states put a “use tax” line on the state income-tax return, sometimes with a lookup table that estimates a safe-harbour amount from your income so you do not have to itemise small purchases. Compliance is low and enforcement against individuals is light. |
| Anyone registering a vehicle, boat, or aircraft | Always. The DMV or equivalent collects use tax on an out-of-state or private-party purchase before it will issue a title or registration, so this is the one use-tax bill individuals cannot skip. |
The Wayfair effect
Before 2018, a seller had to collect a state’s sales tax only if it had a physical presence there. The Supreme Court’s decision in South Dakota v. Wayfair (2018) let states also require collection based on an economic presence — commonly $100,000 of sales or 200 transactions into the state per year. Combined with marketplace facilitator laws (which make Amazon, eBay, Etsy, Walmart Marketplace, etc. collect on behalf of their third-party sellers), this shifted the large majority of consumer online purchases from “use tax the buyer theoretically owes” to “sales tax already collected at checkout.”
The individual use-tax gap still exists, but it is now mostly limited to:
- Purchases from small sellers below a state’s economic-nexus threshold.
- Goods carried home from no-sales-tax states.
- Certain business-to-business and cross-border-of-state situations.
A worked example
You live in a county with an 8% combined sales tax rate. Over a year you:
| Purchase | Where | Tax collected | Use tax you owe |
|---|---|---|---|
| $1,200 laptop from a large online retailer | ships to you | $96 (retailer collects) | $0 |
| $300 of parts from a small out-of-state shop that does not collect | ships to you | $0 | $24 |
| $600 of furniture bought in person in Oregon (no sales tax) | carried home | $0 | $48 |
| $150 from a marketplace seller | via the platform | $12 (platform collects) | $0 |
Your use-tax liability for the year is $72 ($24 + $48). Many state income-tax returns have a line to report and pay this, sometimes with a safe-harbour table that lets you pay a small amount based on your income instead of adding up receipts. Big-ticket items excluded from the table (a boat, a vehicle, an item over ~$1,000) still have to be listed individually.
How states actually collect use tax
- On the income-tax return — the voluntary line described above; compliance by individuals is low.
- At registration — the DMV, DNR (boats), or FAA-linked state process collects use tax before titling a vehicle, boat, trailer, or aircraft. This is the one most individuals cannot avoid.
- Business audits — a state auditor reviews a company’s purchase records and assesses use tax (plus penalty and interest) on anything bought without sales tax and consumed in-state. For many businesses this is a larger exposure than the sales tax they collect.
- Information sharing — states exchange data, and some require large out-of-state sellers who do not collect to send the state (and sometimes the customer) an annual report of what was purchased.
Consumer vs seller use tax
Two flavours of the same tax:
- Consumer (or “use”) tax — owed by the buyer on taxable items used in-state when no sales tax was charged. The focus of this article.
- Seller’s use tax (also “retailer’s use tax”) — owed by an out-of-state seller that has nexus and must collect the destination state’s tax on sales shipped in. Functionally it is the sales tax, just administered under a different name because the seller is remote.
Common misconceptions
- “Use tax is a new internet tax.” It has existed since sales taxes began; the internet just made the gap visible.
- “If the site didn’t charge tax, I don’t owe anything.” Legally you may owe use tax; whether the state pursues an individual for it is another question.
- “Businesses only deal with sales tax.” Use tax on their own purchases is often the bigger audit exposure.
The bottom line
Sales tax is collected by the seller; use tax is owed by the buyer when sales tax was not collected on something taxable used in-state — same rate, same purpose, closing the cross-border loophole. Businesses pay it routinely; individuals mostly encounter it only when titling a vehicle. Since Wayfair, most online orders already have sales tax collected at your address, so the individual use-tax gap has shrunk. See combined sales/use tax rates by state on the sales tax page.