Understanding taxes can sometimes feel tricky, but knowing the difference between sales tax and use tax is valuable for both consumers and businesses. These two taxes ensure that governments collect revenue from purchases, but they work in slightly different ways. Let us break it down:
What is Sales Tax?
Sales tax is a form of consumer tax that buyers pay when purchasing goods or services within their state. The seller collects this tax at the time of sale and remits it to the state or local government. This tax is considered a seller privilege that allows businesses to conduct sales while ensuring the government receives the necessary revenue to fund public services. Sales tax rates vary depending on the state, and some local areas may impose additional taxes on top of the state rate.
Sales tax applies to most goods and services, but some states have exemptions for items like groceries or prescription medicine in states like Connecticut, Maryland, Minnesota, New Jersey, New York, Pennsylvania, Texas, Vermont, Virginia, and the District of Columbia. The rate can vary depending on where you live, as some cities and counties add their taxes on top of the state rate. Some states have different forms of sales tax; for example, Arizona has a transaction privilege tax and Hawaii has a general excise tax which is the same thing as sales tax.
For buyers, understanding sales tax means recognizing that it is a consumer tax applied to almost every in-state purchase. This tax is a key part of the transaction, making it clear that consumers bear the cost at the time of sale. For example, if you buy a new pair of shoes from a store in your city, the store will add sales tax to the total, and you pay it right there.
Key Points About Sales Tax:
- Who Collects It? The seller
- When is It Applied? At the time of purchase
- Where Does It Go? Directly to the state or local tax authority
Sales tax is paid monthly, quarterly, and annually depending on the tax authorities’ determination of businesses. States like Alaska do not have state sales tax but have local sales tax which is paid to Alaska’s local authorities. Sellers must track rates accurately and maintain records to avoid audits or penalties.
What is Use Tax?
Use tax applies when goods are purchased without paying sales tax, typically from out-of-state or online vendors. If a retailer does not collect sales tax during the purchase, the buyer is responsible for reporting and paying the consumer use tax to their home state. This ensures that local businesses are not disadvantaged and helps maintain fair competition. Though less visible than sales tax, use tax is critical in supporting state budgets and public services.
For example, if you buy furniture from an out-of-state or order a gadget from an online retailer based in another state, a retailer doesn’t charge sales tax, you must report and pay. Without a use tax, people could avoid taxes by shopping online or out of state. This tax also helps fund important public services like schools, roads, and emergency services.
States like Alabama have seller use tax. This is for interstate sales of out-of-state businesses that have a nexus with a particular state and are required to collect and remit seller use tax rather than sales tax. In most cases, it is known as sales tax but it is different.
How to Pay Use Tax
Paying use tax might sound complicated, but it’s simpler than you think:
- Visit Your State’s Tax Website – Most states have online forms for reporting and paying use tax.
- Save Receipts – Keep records of purchases made out of state or online.
- Calculate the Tax – Use your local tax rate to figure out how much you owe.
Key Points About Use Tax:
- Who Pays It? You, the buyer
- When is It Applied? After purchase, when no sales tax was charged
- Where Does It Go? You report and pay it directly to your state or local tax office.
Ignoring use tax can lead to penalties, so it’s important to know when you owe it. Many states, including California, track large purchases made out-of-state.
How Sales Tax and Use Tax Are Different
1. Who Collects the Tax?
- Sales Tax: Collected by the seller at the time of purchase
- Use Tax: Paid by the buyer directly to the state
2. When Do You Pay It?
- Sales Tax: Right at checkout
- Use Tax: After the purchase, usually during tax season.
3. Why Do They Exist?
- Sales Tax: This ensures that states collect tax revenue from purchases made within the state.
- Use Tax: Prevents tax avoidance by taxing purchases made from out-of-state sellers.
Retailer obligations include accurately collecting and remitting sales tax and understanding remote sales laws. This not only keeps you compliant but also supports your community by funding public services. Automated tools and tax professionals can help businesses manage tax collection and avoid errors. Sellers and buyers should always stay updated with tax rate changes.
If you need help, SUTC can guide you through the process and help you stay compliant.
FAQs About Sales Tax and Use Tax
1. Is use tax the same as sales tax?
Not exactly. Sales tax is charged at the point of sale, while use tax is paid by the buyer when sales tax isn’t collected.
2. What happens if I don’t pay use tax?
You could face tax liabilities like penalties, fines, or interest. Some states audit large out-of-state purchases.
3. How do I know if I owe use tax?
If you bought something from another state and didn’t pay sales tax, you likely owe use tax.
4. Do all states have a use tax?
Yes, almost all states that have sales tax also have a use tax.
5. What is nexus, and how does it relate to taxes?
A nexus is a connection between a business and a state. If a business has a nexus in a state, it must collect sales tax. Out-of-state sellers without nexus may not charge sales tax, but the buyer still owes use tax.
