Published February 5, 2025
Sales Tax vs Use Tax: What’s the Difference?
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Sales and use tax are often clumped together in the same sentence as if they are the same thing, which can be misleading. Most people are familiar with sales tax, but use tax can be a bit of a gray area for both businesses and consumers. Understanding the difference is key to staying compliant. Their differences could affect your bottom line.
Learning the nuances of sales and use taxes can help you avoid unexpected liabilities, ensure proper financial planning, and maintain compliance.
Sales and use tax are not the same thing, but they are related. Use tax is a conditional sales tax that is applied in certain situations rather than on all goods and services.
Understanding how sales tax works is fairly straightforward. Retailers collect sales tax at the point of sale. Businesses are responsible for charging the correct sales tax rate and remitting that tax back to the government. Use tax, on the other hand, applies when goods or services are purchased without sales tax, often from out-of-state or online vendors. Unlike sales tax, the responsibility of paying use tax lands on the consumer.
Sales tax is generally a percentage of a purchase price at a rate determined by state and local authorities. Rates can vary across different jurisdictions, so as a business owner, it’s important to be familiar with the sales tax rates anywhere you do business, particularly if you have nexus.
Economic nexus is a threshold that, once crossed, determines your tax responsibilities in a given area. Different jurisdictions have different standards for what qualifies as nexus. It could be volumes of sales, number of transactions, or physical presence in different forms (warehouse, employees, distribution centers).
Even within one jurisdiction, different items can be taxed at different rates. Some items, like groceries, can be tax-exempt. Some states (Oregon, Michigan, Alaska, Montana, and New Hampshire) don’t impose a sales tax. However, Alaska allows local jurisdictions to determine if they wish to impose sales tax.
Sales tax is an important source of revenue for the government. It goes toward funding things like schools and infrastructure.
The purpose of use tax is to still collect sales tax on items that would normally be taxed. It also hopes to avoid out-of-state shopping from hurting local businesses. For example, border towns with the state of Oregon (where there is no sales tax) could see a loss of business if shoppers continually shop across state lines in favor of no sales tax. Use tax applies if your goods or services are purchased in an area without sales tax, but then consumed or used in your local jurisdiction where there is applicable sales tax.
Since use tax is a type of sales tax, the use tax rate is the same as the sales tax rate in your local jurisdiction. That means that the same rules apply for both types of tax. If your state doesn’t tax groceries (like California), you wouldn’t owe use tax on groceries purchased in Oregon, for example.
The biggest difference between the two taxes is who is responsible for remitting the tax. Use tax is self assessed by the consumer, which makes it difficult to enforce. It’s entirely up to the consumer to determine how much they need to pay. You can consult your sales tax expert for more help determining your use tax liability.
| Sales Tax | Use Tax | |
| Definition | Tax collected by the seller at the point of sale on tangible goods or services | Tax paid by the buyer when no sales tax was collected by the seller, common with out-of-state purchases |
| Who collects the tax? | The seller | The buyer |
| When is it applied? | Applied at the time of purchase for goods and services sold within a jurisdiction that imposes sales tax | Applied when goods are purchased without sales tax, either out-of-state or online |
| Purpose | To generate revenue for the jurisdiction where the sale occurs | To prevent consumers from avoiding sales tax and purchasing goods outside their jurisdiction for use within it. |
| Example | Shopping at your local retailers | Shopping online from a retailer in a jurisdiction that doesn’t impose sales tax or purchasing from an out-of-state supplier |
| How is the rate determined? | Based on the location of the seller and the sale | Based on the location where the goods or services are being consumed or used |
| Remittance Responsibility | The seller | The consumer |
| Penalties for Noncompliance | Failure to collect or remit sales tax can result in penalties or interest for the seller | Failure to self-report use tax can result in penalties, audits, or back taxes owed by the buyer |
Use tax is a complementary tax, so sales tax and use tax are never charged at the same time. While the rate is most commonly the same as sales tax, it’s always smart to do your research to determine the use tax rate in your jurisdiction.
At first glance, use tax may appear like solely a consumer tax. There are two different classifications for use tax: consumer use tax and seller use tax.
Understanding the various tax types is important because the rates vary, and in some states, separate returns are due for each tax type.
While your focus may be on sales tax, you could also have unresolved use tax responsibilities that you don’t want to miss. Like all unpaid taxes, you could be facing an audit, interest, penalties, or fees for overdue use taxes. As a business, you may be more likely to face an audit than private consumers, so don’t think you can get away with unpaid use taxes.
If your business doesn’t account for use tax on purchases, you may experience cash flow problems later on when you get hit with unexpected tax bills. Regularly managing and paying your use tax can keep cash in your business and help you avoid cash shortages.
As you shop out-of-state and online for your business, be aware of which vendors are not required to charge you sales tax. In these cases, you are responsible for paying use tax on those purchases.
Sales and use tax become more complex as your business grows and operations expand into new jurisdictions. Understand your tax responsibilities wherever you are making purchases (as well as where you are making sales) to avoid underpaying taxes.
By properly accounting for use tax, businesses can manage their overall tax liability more effectively. These strategies will help leaders and finance teams identify and monitor use tax obligations.
There are automated solutions that can help businesses quickly and accurately manage purchases that are subject to use tax. Your tax management software may already have this feature. Integrating with ERP platforms can help minimize the manual effort and reduce the chance of errors.
Keep a detailed record of expenses and invoices where sales tax was not collected. Again, your accounting software can be programmed to identify these transactions.
Implement clear policies with your team that outline when and how use tax is assessed and reported. If you work with regular vendors that don’t collect sales tax, you already know that you need to flag all purchases to review for use tax.
Tax legislation changes often. Regularly review your vendors and evolving tax laws to stay compliant. Scheduling monthly or quarterly reviews can help your team manage changes to both sales and use tax law.
Many states offer exemptions or refunds for certain types of purchases, such as goods purchased for manufacturing or resale. To minimize your tax liabilities, research all applicable exemptions in the states where you are currently operating. Exemptions require proper documentation, so carefully track and file all exemption certificates. You’ll be grateful for this during a tax audit.
Overpayment of sales and use tax can also occur. If you discover that you’ve overpaid for either type of tax, it may be possible to request a refund. This could result in significant savings for your business.
While use tax is a lesser-known or understood tax, it can be seamlessly integrated into your overall tax strategy to streamline your tax payments and improve your company’s financial health. Include any anticipated use tax liabilities in your budgeting process to avoid unexpected tax payments. Set aside cash for sales and use tax throughout the year to reduce cash flow hang ups.
Consider how use tax can drive purchasing decisions. For large purchases in particular, there may be advantages to making them in a jurisdiction with no sales tax and paying your local rate versus a high sales tax rate in other locations.
To alleviate the use tax management from your finance team, consider the advantages of working with sales tax specialists who can help you identify use tax obligations and advise in overall tax strategies.
Tracking new legislation regarding sales and use tax is a major component of a successful tax strategy. Federal and state laws can change your tax responsibilities and rates. Without careful monitoring, your business could be overcharging customers, underpaying tax returns, or missing tax obligations entirely. Either way, it can throw a wrench in your cash flow management plan and should not be taken lightly.
For example, in March 2024, Indiana retroactively removed the transaction threshold for remote seller nexus under the sales tax. Marketplace facilitators and remote sellers are only required to collect sales tax when gross sales exceed $100,000. Wyoming also had a similar change.
States regularly make adjustments to tax laws and rates, so stay vigilant to ensure your company’s compliance.
Managing use tax can be a natural part of your tax planning strategy. With the right systems and information in place, you can regularly manage your use tax with confidence. Hop on a call with the The Sales Tax People to learn more about how we can help.
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