Understanding the difference between sales tax and use tax

Sales tax compliance can get complicated as a company expands, and understanding the varying sales tax laws can complicate things even further. In this article, we discuss the differences between sales tax and use tax.

What is sales tax?

Sales tax is a tax imposed on the sale of goods and services, calculated as a percentage of the purchase price, and added to the final cost of products or services. The sales tax rate varies in each state, with different states and localities having their own rates. In the United States, sales tax is not a federal tax, but rather a state and local tax.

What is use tax?

Use tax is a tax that is imposed on the use, storage, or consumption of goods and services that were purchased without paying sales tax. It is typically imposed by the state or local government where the goods or services are used, and the rate is often the same as the sales tax rate. Use tax is designed to ensure that people who purchase goods and services from out-of-state vendors or online retailers pay the same amount of tax as they would if they purchased the goods or services locally.

How are sales tax and use tax different?

Sales tax and use tax are both types of taxes that are imposed on the sale of goods and services. The main difference between the two is that sales tax is a tax on the sale of tangible personal property, while use tax is a tax on the use of that property within a state.

Sales tax is generally charged by the seller at the time of the sale, while use tax is typically self-assessed by the purchaser when the seller has not charged sales tax. Use tax is often applied to goods that are purchased outside of the purchaser’s state and then brought into the state for use, as well as to goods that are purchased online or through catalogs.

Historically, in-state sellers collected the sales tax, while purchasers paid the use tax on sales that occurred out-of-state or in interstate commerce. In the post-Wayfair world, a remote seller is often required to collect the tax, whether the state labels it a sales tax or a use tax.