What is this thing called Use Tax?

by Chuck December 17, 2010

Use Tax

What is this thing called Use Tax?

What is Use Tax?

Use tax is a type of sales tax on imposed on purchases made outside a home state when sales tax has not been paid. Goods are subject to either sales tax, but not both. Use tax, unlike sales tax, is due at the rate where the purchaser first uses the article, not where the sale takes place. Sales tax may also be due on any freight, delivery, or shipping charges paid to the seller.

When Is Use Tax Due On Purchases

Goods are purchased in another state that does not have a sales tax or a state with a sales tax lower than the state the purchaser is in.  For example, items purchase in Oregon that are used in Washington are subject to sales tax.

Goods are purchased from someone who is not authorized to collect sales tax.  For example, purchases of furniture from an individual through a newspaper classified ad or a purchase of artwork from an individual collector.

Use tax is due on Internet purchases when sales tax is not

Goods are purchased out of state by subscription, through the Internet, or from a mail order catalog company that does not collect tax at the time of the transaction.

Personal property is acquired with the purchase of real property.

Not All Sales Tax Derives from Sales

There are also internal transactions a company might initiate that will trigger use tax consequences.

For example, ABC Furniture Company buys its inventory tax-free with a resale certificate, then charges sales tax to its customers. But if this company removes furniture from inventory for use in the retail store by its sales staff, it has triggered a tax incident: use tax is due on the converted inventory that is being used, not sold. The states differ in the tax basis of such a transaction: some tax [cost], others [cost + overhead], and still others [cost + overhead + markup].

Level Playing Field?

States claim that use tax puts in-state retailers on a level playing field with remote sellers. But, while a brick-and-mortar store only has to deal with the sales tax laws of its own location, remote sellers have to deal with the sales tax laws of many jurisdictions – up to every U.S. state and locality that assesses them, if the company has a presence or “nexus” in every state.

To complicate matters even further, both states and the federal government have recently suggested expanding the definition of nexus in the hopes of generating more tax revenues. As unlikely as a nation-wide sales tax – something like the Value Added Tax (VAT) Europe uses – might have seemed a few years ago, the possibility grows higher as the recession drags on.

Does your state charge Sales Tax?

Currently, every state that imposes a general sales tax also imposes a sales tax. That includes 45 states plus the District of Columbia.  The five states without general sales taxes are: Alaska, Delaware, Montana, New Hampshire and Oregon.  Visit our Sales and Use Tax Rates By State for updated rates.


Charles F. Spielmann


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