Posted by Tucker Accounting Services LLC

Comparing Use Tax and Sales Tax

Comparing Use Tax and Sales Tax

There are many ways in which sales compliance form applies, and one of them is the Use Tax. It is one of the terms common when applying for a sales tax permit in any state or accessing the threshold of economic nexus in your state.

Generally, sales and use tax refer to the same thing. It is a part of the sales price, usually a percentage collected by a consumer and directed to the government. The form of collection and remittance of these taxes comes with subtle differences.


What is a Sales Tax  

Sales tax is generally the tax applied to the sale, exchange, and transfer of a service or an item when being sold. This tax is usually included in the final price of goods and passed on to the final consumer. 

Every business with nexus (these are businesses that have gotten to the threshold of the allowed economic transaction) needs to charge sales tax even at the state level.


Sellers Use Tax 

Use tax is another term for sales taxIt is a transaction tax, which is usually estimated as a percentage of the sales tax. 

Generally, seller’s Use Tax only applies to remote sellers. Remote sellers are classified as businesses with nexus in their state but with physical presence elsewhere. 

We define use tax as a tax on the use, storage, and consumption of taxable items with no sales tax paid. It is complementary to sales tax, which points to the fact that both are mutually exclusive. Generally, the use tax collection is at the same rate as sales tax, even though not always true. 


Consumer Use Tax 

Use tax or consumer tax are two similar taxes applied when the tax is passed to the buyer. If the sales tax comes from the consumer, such is called a consumer use tax.

The person who buys the good pays the consumer use tax directly to the state revenue department, which happens by filing the use tax. In other states, they will have to include the value of the income tax filed on their return every year in the state.

Many states do not enforce their consumer use tax except for expensive goods, such as an SUV or laptop PC. Most states desire that sellers that get to the economic nexus, in-state sellers, out of state sellers, should pay tax so that there will be a level playing field. 

Taking California's use tax as an example, it applies to the consumption, use, and storage of items within the state. As a general rule, if buying a physical good in California will trigger sales tax, there will be Use Tax when you make a similar transaction without tax from a business that is not in California. 

The use tax serves as a support to California's sales tax, which helps make the playing field neutral for in-state retailers that need to collect tax alongside some retailers that do not. The idea of use tax is to fund local and state services through California.  


Examples of Sales Tax and Use Tax

For a business located in Hawaii, and you make sales to customers in Hawaii, you will charge them sales tax. 

For a business that is not located in Chicago, customers will have to pay use tax with an economic nexus there. 

A customer that wants to buy a car from New York that will be stored in Chicago, without the payment of sales tax at the point of purchase, then the State of Chicago might charge a use tax. 


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