Use tax is a state-imposed tax on the storage, use, or consumption of tangible personal property or certain services when sales tax has not been paid at the time of purchase. It is designed to complement the sales tax system and ensure that all taxable transactions are subject to tax, regardless of where the purchase occurs. Use tax typically applies when goods are purchased out-of-state or from sellers who do not collect the applicable state sales tax, and then brought into the state for use, storage, or consumption.
There are two main types of use tax: consumer use tax, which is paid by the end user of the goods or services, and seller’s use tax, which is collected by out-of-state sellers who have nexus in the state and remit the tax on behalf of the purchaser. The use tax rate is generally the same as the state sales tax rate, and it is a critical tool for states to maintain tax equity and prevent revenue loss from cross-border or online purchases.
While both use tax and sales tax are imposed on the purchase of goods and certain services, they differ in their point of collection and the party responsible for remittance. Sales tax is collected by the retailer at the point of sale and remitted to the state. In contrast, use tax is self-assessed and paid directly to the state by the purchaser when sales tax was not collected at the time of purchase.
For example, if you buy a computer from a local store, the retailer collects sales tax. If you buy the same computer online from an out-of-state seller who does not collect your state’s sales tax, you are responsible for reporting and paying use tax on that purchase. This distinction is crucial for tax compliance, especially as e-commerce and remote sales continue to grow.
Purchases are subject to use tax when sales tax was not paid at the time of purchase and the goods or services are used, stored, or consumed within the state. Common scenarios include:
In California, many taxpayers overlook their obligations when buying from online retailers, auction sites, television shopping networks, or mail-order catalogs. If sales tax was not collected, state use tax still applies, and individuals must review receipts to confirm whether tax was paid. This issue is common when sellers are not “engaged in business” in California, meaning they may not be required to collect used tax under State and Local Tax rules. When that happens, the responsibility shifts entirely to the purchaser to self-report and pay the tax.
California also makes clear that purchasers owe use tax when out-of-state businesses do not charge it, even if those companies are not registered with the state. Some retailers voluntarily register to help customers comply, but many do not. While exemptions exist, such as those for prescription medicines and certain food items, taxpayers should understand how California use tax interacts with State Gross Receipts Taxes and other state-level obligations to ensure they remain compliant.
Reporting and paying use tax is typically the responsibility of the purchaser. The process varies by state but generally involves the following steps:
States may offer voluntary disclosure agreements (VDA) for taxpayers who wish to come into compliance with past-due use tax obligations. Accurate recordkeeping is essential for both individuals and businesses to document purchases and support tax compliance.
Purchases include tangible personal property, certain digital goods, and taxable services acquired without paying sales tax. This often includes online purchases, out-of-state transactions, and items brought into the state for use, storage, or consumption. Exemptions may apply for items like prescription drugs or goods purchased for resale.
If you buy goods online and the seller does not collect your state’s sales tax, you likely owe use tax. Check your receipt or order confirmation; if no sales tax was charged and the item is taxable in your state, you must self-assess and pay use tax on the purchase price.
Yes. Consumer use tax is paid directly by the purchaser when sales tax was not collected. Seller’s use tax is collected and remitted by out-of-state sellers who have nexus in the state. Both taxes serve to ensure that all taxable transactions are properly taxed, but the party responsible for remittance differs.
States collect use tax through self-reporting on income tax returns, dedicated use tax forms, and business tax filings. Enforcement includes audits, data matching, and penalties for noncompliance. Some states also require out-of-state sellers to notify buyers of their use tax obligations or to report sales to the state.
Businesses may claim exemptions for purchases intended for resale, manufacturing, or other qualifying uses. Deductions or credits may also be available for sales tax paid to another state, preventing double taxation. It is important for businesses, especially those in the construction industry or software sector, to understand applicable exemptions and maintain proper documentation for tax compliance.
By understanding use tax and its application, both individuals and businesses can ensure compliance, avoid penalties, and support fair competition among in-state and out-of-state sellers. For more information, consult your state’s department of revenue or a qualified tax advisor.
Never miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now