What Is Use Tax?

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What Is Use Tax?

What Is a Use Tax?

The term use tax refers to a conditional sales tax. The use tax is charged on any goods purchased without paying a sales tax when one would normally be applied in their home state. One of the most common instances of the use tax is when someone buys goods from another state where no sales tax is levied and the consumer intends to use, store, or distribute the goods where a sales tax would normally apply. The rate is generally the same as the local sales tax rate. It’s up to consumers to calculate and pay use taxes, which makes it difficult to enforce.

Key Takeaways

  • The use tax is levied on items that are used, distributed, or stored in a state where sales tax is ordinarily levied but bought in a state where no sales tax is levied.
  • In most cases, the use tax is levied at the same rate as the local/state sales tax.
  • The usage tax is calculated and paid to the government by the consumer.
  • The use tax is intended to shield in-state shops from competition from out-of-state vendors who are not required to collect sales taxes.
  • The usage tax is difficult to enforce since customers are responsible for reporting and paying it.

Understanding Use Taxes

The use tax is a type of sales tax charged on certain goods. Unlike a sales tax, the use tax is only applied in certain circumstances rather than on all goods and services. The use tax is charged by a consumer’s home municipality or state in any number of cases. Some of the most common ones include:

  • When a customer buys something outside of their home state and the merchant does not apply sales tax. If the consumer plans to use or store the items in an area where a sales tax is levied, the use tax is levied.
  • When products are acquired from a merchant who does not charge sales tax.
  • Professionals who buy things for their business in a state where there is no sales tax but will utilize them in a state where there is.

The use tax rate is the same as the resident’s local sales tax rate, which includes both state and local sales taxes. It is up to consumers to calculate and pay use taxes on any applicable purchases they make. A resident who does not pay use tax may be subject to interest and penalties.

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California citizens, for example, must pay sales tax on items such as furniture, presents, toys, apparel, automobiles, mobile homes, and airplanes. If a Californian buys clothes from a California merchant, the retailer will collect and submit sales tax to the tax authorities at the moment of sale. There will be no extra tax to pay. If they bought similar items in Arizona, where there is no sales tax, they would have to pay tax if they brought them back to California.

Use Tax vs. Sales Tax

In the end, a usage tax is the same as a sales tax. The government levies a sales tax on the sale of goods and services. It is added to the purchase price at the point of sale, which means it is collected and sent directly to the government by the seller.

The rate of sales tax varies by jurisdiction. Some states levy a larger sales tax than others, while others levy none at all. Certain commodities, such as food, clothes, and books, are exempt from sales tax in certain states. Others impose a flat tax on everything.

The rate of the use tax is generally the same as the rate of the local/state sales tax. The distinction is in how it is calculated and how it is accounted for. The use tax is self-assessed and submitted by the end consumer, thus if you make a purchase and are responsible for your state’s use tax, it is your responsibility to calculate and pay the amount owed.

The use tax is often more difficult to impose than the sales tax and is only applied to substantial purchases of physical commodities in reality.


The number of states with an usage tax. It is the same number of states that have a sales tax.

Use Tax and Nexus

A physical presence, such as a sales office or warehouse, is considered a nexus. This presence, however, is not confined to these cases. In reality, you may establish a nexus simply by having an employee or associate in a state, or even a partner website that sends visitors to your website in return for a cut of the revenues. So, what does this have to do with an usage tax?

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Retailers are not normally obligated to collect sales tax on transactions made by customers in states where the merchant has no physical presence. As a result, it is the consumer’s responsibility to compute and return the tax to his or her state government. The way a government defines nexus determines whether a firm pays sales taxes to that government.

Tensions sparked by the e-commerce industry’s reluctance to pay sales taxes drove several governments to pass legislation requiring corporations to pay their fair amount. For example, in New York, online businesses such as Amazon are required to pay sales taxes despite their lack of physical presence in the state.

Purpose of Use Tax

The use tax is intended to protect in-state shops from unfair competition from out-of-state suppliers who are not compelled to collect tax. It also assures that all citizens of a state contribute to the funding of state and municipal programs and services, regardless of where they purchase. Most states, not just California, have similar laws.

As previously stated, it is often difficult to enforce. This is because it is the responsibility of the customer to report and pay the use tax. As a result, governments lose income from items bought in locations where no sales tax is collected, which is why some states compel online retailers to collect taxes whenever their consumers make transactions.

Example of Use Tax

Assume a Californian purchased clothes from an internet merchant in Oregon. Under Oregon law, the merchant does not collect sales tax on the products, but the retail consumer must still pay a use tax to the California tax body known as the Board of Equalization on that clothes transaction.

On the other hand, if the Californian bought food in Oregon and did not pay sales tax, no use tax would be required since the bulk of goods are not taxed in California.

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What Does the Use Tax Mean?

A sort of sales tax is the usage tax. It is levied on items acquired and carried back from a consumer’s jurisdiction where no sales tax is levied. In general, the rate is the same.

What’s the Difference Between the Use Tax and the Sales Tax?

A sales tax and a usage tax are essentially the same thing. They are used to describe both commodities and services. The distinction is in how they are computed and who pays them. Unlike sales tax, which is imposed at the time of purchase and collected and submitted to the government by the seller, use tax is computed and paid by the customer or end user. However, the rate is often the same as the local/state sales tax.

How Much Is the Use Tax in California?

In California, the use tax rate is 7.25%, which is the same as the state sales tax.

The Bottom Line

Taxation has several forms. However, many individuals are unaware of the usage tax, which is levied on customers in practically every state. The use tax is a kind of sales tax that you must pay for products and services that you plan to use in a state where you would ordinarily pay sales tax and buy elsewhere where sales tax is not needed. This is done by the government to guarantee that local vendors are not disadvantaged. However, it might be difficult to implement since many customers fail to disclose or pay their usage taxes. Nonpayment of usage taxes may result in fines or penalties. To learn more about how to pay any usage taxes you may owe, contact your state’s tax agency.

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