Definition
Use Tax is a type of tax levied in the United States by numerous state governments. It is designed to discourage the purchase of products that are not subject to sales tax in the state where the consumer resides. Use tax is typically applied to items purchased out of state or country, either through online shopping or traveling, where sales tax hasn’t been paid.
Key Takeaways
- Use tax is a type of tax imposed on products and services purchased from other states or countries, which are not subject to sales tax at purchase time.
- This tax is typically assessed to ensure that all purchases, irrespective of where they are made, are subjected to the same tax levels within a specific jurisdiction, to promote fairness and equity in taxation.
- It is the responsibility of the consumer to calculate and remit the use tax to the appropriate tax authority, typically on their tax returns or through specific forms provided by the tax authority.
Importance
Use Tax is an important financial term as it relates to transactions where sales tax hasn’t been charged.
This typically applies to purchases made outside one’s taxing jurisdiction, especially for items intended to be used, stored, or consumed in one’s home state.
Use tax, essentially, serves to level the playing field between out-of-state retailers who aren’t required to collect tax, and in-state retailers who are.
It helps to counteract attempts to avoid sales tax by purchasing items from states or countries where the sales tax rate is lower.
Also, it ensures that all consumers contribute fairly to the tax base regardless of their shopping methods or preferences, and this guarantees that the state generates revenue for public utilities and services.
Explanation
The purpose of Use Tax is largely to guard against the avoidance of sales tax by those who make out-of-state purchases. It is a type of tax imposed on items that are used in a specific jurisdiction where the items have not been subjected to the local sales tax.
Look at this way, if you bought an item from a state with no sales tax or lower sales tax than your own state, your state can still recoup some of that lost revenue by charging you a use tax. This helps ensure fair competition for local businesses and also maintains the state’s revenue stream.
Use Tax is used for a variety of expenditures ranging from physical goods to services and intangibles. It applies to items you purchase for use, storage or other consumption in your own state, irrespective of where you bought the items or whether the purchase was from an online retailer or from a physical store location.
If the seller doesn’t collect sales tax, it becomes the buyer’s responsibility to pay use tax. Hence, it serves as a way to level the playing field between out-of-state retailers who may not be required to collect tax, and in-state retailers who do.
Examples of Use Tax
Online Shopping: A common example of use tax applies to online shopping. Say, an individual living in California purchases a product online from a company based in Oregon, a state where there is no sales tax. When the product is shipped to the individual in California, they are expected to report and pay a ‘use tax’ on that product to the state of California, as they will use, give away, store, or consume the product in California. This is because the state misses out on the sales tax due to the sale taking place out of state.
Out-of-State Vehicle Purchase: An individual purchases a vehicle in a state with lower sales tax or no sales tax, with an intention to use it in a state where sales tax is high. In this case, the individual’s resident state will impose a use tax equivalent to the difference between the tax they would have paid if they had bought it from their home state and the amount already paid in the lower-tax state.
Business Use: A business purchases resale inventory without paying sales tax under a resale exemption. If the business later uses the inventory for purposes other than resale – for example, using office supplies off the shelf or removing an item from inventory for personal use – the business owes use tax on those items.
FAQ – Use Tax
What is Use Tax?
Use tax is a tax chargeable on items purchased in an area without a sales tax or items which are taxable that are used, stored or consumed in an area. This is typically due when online, mail or telephone purchases are made and the item is shipped into a state that does charge a use tax.
Who is Responsible for Paying Use Tax?
The end consumer of the product or service pays the use tax. It is paid to the revenue department of the state where the goods are used, stored, or consumed.
How is Use Tax Calculated?
Use tax is calculated at the same rate as the sales tax at the purchaser’s address. Therefore, if the sales tax rate in your area is 8.5%, then the use tax rate is also 8.5%.
What is the Difference Between Sales Tax and Use Tax?
Sales Tax is charged on the sale of tangible personal property or taxable services. Use tax is charged when taxable goods or services are used, stored, or consumed in a state regardless of where the purchase took place.
When is Use Tax Paid?
Use tax is usually due annually but can vary by jurisdiction. You might have to pay use tax when you file your state tax return, or potentially throughout the year.
Related Entrepreneurship Terms
- Consumer Use Tax
- Sales and Use Tax Regulations
- Non-Tangible Property Tax
- Out-of-state Purchases Tax
- Self-assessed Tax
Sources for More Information
- Internal Revenue Service (IRS): This is the U.S. government agency responsible for tax collection and tax law enforcement. It provides broad coverage on taxes including Use Tax.
- Urban-Brookings Tax Policy Center: A joint venture of the Urban Institute and Brookings Institution, The Tax Policy Center provides independent analyses of current and longer-term tax issues.
- Avalara: Avalara is a company that provides solutions for sales tax automation, including use tax. Its resource center provides many articles about taxes.
- Investopedia: Investopedia is a leading source of financial content on the web, with comprehensive information on use tax, how it works, and its significance.
