Have you ever noticed how sometimes we hear a phrase so often that we don't really think about what it means? "Sales and use tax" is one of those phrases that we've probably all heard before, but have you ever stopped to think about what "use tax" actually means? While most of us are familiar with "sales" tax, "use" tax is a concept that often gets overlooked or misunderstood.
Let's take a moment to give "use tax" the attention it deserves and learn more about it.
Use tax is officially defined as the tax on the use, consumption, or storage of a taxable item or service on which no sales tax has been paid. It is required to be paid by the consumer in cases where the seller does not collect sales tax.
The use tax is a form of taxation that applies to specific goods and is charged by a consumer's home municipality or state. Unlike sales tax, which is typically applied to all goods and services, the use tax is only charged under certain circumstances.
Here are some common instances where use tax is charged.
Use tax is a complementary tax; it’s not charged if sales tax is charged. The use tax rate is typically the same as the local sales tax rate, but this also varies per state. It is left up to consumers to calculate and pay use taxes, which makes it challenging to enforce. However, a resident who does not pay use tax may be subject to fines, interest, and penalties.
Here’s an example to drive the concept home.
In California, sales tax applies to a range of items, including furniture, clothes, toys, vehicles, mobile homes, etc. If a Californian purchases clothing from a California-based retailer, the retailer will collect sales tax from the buyer at the point of sale and remit it to the tax authorities. However, if they buy any of these items in Oregon, where sales tax is not charged on the goods, and bring them back to California, they will be required to pay the use tax.
However, let’s say the buyer in California bought some groceries in Oregon and didn’t pay sales tax on that purchase. In this case, no use tax would be imposed because California doesn’t tax groceries.
As previously mentioned, use tax also has it’s nuances per individual state or jurisdiction and if you’re faced with questions, it’s a great time to reach out to a sales tax consultant.
Those who are familiar with use tax may commonly think of consumer use tax. As mentioned earlier, this is when a seller doesn't charge sales tax, and the consumer or buyer is responsible for paying the use tax. But to cover all the bases, let’s talk about another type of use tax known as the seller's use tax.
Here’s the difference between consumer and seller use tax.
It is important to understand the various tax types because the rates vary, and in some states there are separate returns due for each tax type.
Even though enforcing use tax can be challenging, it’s best not to ignore it.
Clearly, taxation takes on many forms. Use tax is one of the lesser-known types, even though it’s imposed on buyers by nearly every state. It is there to ensure that local vendors aren’t at a disadvantage.
Similar to other aspects of sales tax, use tax doesn't have a universal solution. By delegating sales and use tax management to a specialist, you can cut down on the time, money, and stress involved in handling it yourself. Hop on a free “What’s Next Call” to get any more information you need regarding use tax!