What businesses need to know about sales tax, consumer use tax and seller use tax
Updated September 30, 2020; originally published April 23, 2019.
There’s more to sales tax compliance than sales tax. Namely, use tax, which comes in two flavors: consumer use tax and seller use tax. Though all three are often lumped together as “sales and use tax,” there are important distinctions between them.
To properly register a business with a state then correctly file and pay sales and use tax, you need to understand what each tax is, which situations call for each type of tax, and if/when you’re responsible for remitting sales tax, consumer use tax, and/or seller use tax. Read on to deepen your understanding of all three.
How sales tax nexus triggers sales tax obligations
Whether sales or use tax applies to a transaction depends primarily on sales tax nexus, the connection between a seller and a state that permits the state to impose a sales tax collection obligation on the seller.
Having a physical presence in a state establishes nexus and an obligation to register with the tax authorities then collect and remit sales tax. In-state businesses (and individuals) are also liable for consumer use tax.
As of June 21, 2018, businesses with no physical presence in a state can establish nexus solely through their economic activity in the state (economic nexus). Out-of-state businesses generally aren’t liable for consumer use tax but may be required to collect and remit sales tax or seller use tax. More on that below.
Sales tax (aka retail sales tax) is a transaction tax imposed by states and thousands of local jurisdictions on the sale of a product or service from a seller to a consumer. Since it would be costly and awkward for states to station a tax collector in every shop, the task of collecting sales tax falls on the businesses that make the sales.
Approximately half of all states with a general sales tax are “vendor states,” meaning sales tax is legally imposed on the seller. Sellers are permitted to pass it on to the customer, and most do. The remaining states are “vendee states” in which the seller is legally obligated to collect sales tax from the buyer. Sellers in these states are not allowed to pay the tax themselves (also called “absorbing the tax”).
If a business doesn't collect sales tax as required by law, state and local tax authorities could hold it liable for the uncollected back taxes. This can add up.
Collected sales tax must be held in trust until the seller can file a return and remit it to the proper tax authorities. It’s a crime for a seller to keep collected sales tax revenue as one’s own, so businesses that fail to remit sales tax as required by law may face criminal charges in addition to financial penalties and interest charges.
Did you know? In some states, what feels like a sales tax to consumers may not actually be a true tax on the sale. For example, Hawaii imposes a general excise tax (GET) on businesses, and New Mexico imposes a gross receipts tax on “persons engaged in business in New Mexico for the privilege of doing business in New Mexico.”
Consumer use tax
States created consumer use tax to capture revenue lost when tax isn't collected on a taxable sale. This happens for numerous reasons, outlined below.
When an out-of-state seller doesn't have nexus in a state and therefore doesn't collect sales tax in that state, the buyer is required to remit the corresponding consumer use tax to state and/or local tax authorities. This is true whether the consumer is an individual, business, or other non-exempt entity.
To help recover use tax revenue from such untaxed remote sales, approximately a dozen states require non-collecting sellers to comply with use tax notice and reporting requirements. These include explaining a consumer’s use tax obligations on websites and invoices, as well as submitting reports of consumer purchase activity to consumers and state departments of revenue. Learn more about non-collecting seller use tax reporting.
In-state businesses also run afoul of tax authorities over consumer use tax when they “consume” items purchased, tax-free, for resale.
There are many ways a business can consume an item, including but not limited to the following:
- Charitable donations
- Inventory transfers or withdrawals
- Promotional giveaways
For example, an office supply store that pulls a printer out of inventory for use in its office would owe use tax on that printer. A retailer that donates T-shirts purchased for resale to a local soccer team would owe use tax on those shirts. And so on.
Consumer use tax is also due when non-exempt consumers make a taxable purchase in jurisdictions with a lower rate of tax than the rate in their hometown. For example, a business located in Boston, Massachusetts, that purchases office supplies in sales tax-free Nashua, New Hampshire, would need to remit Boston’s 6.25 percent use tax on those purchases to the Massachusetts Department of Revenue. The burden to report and remit consumer use tax falls on buyers — whether an individual or a business — not sellers.
The same is true when items are purchased abroad for use at home. While you may not get a tax notice for failure to pay consumer use tax on a £15 book purchased in London, don’t be surprised if the tax authorities go after you for consumer use tax on a rug purchased in Istanbul for 150,000 Turkish lira.
Did you know? While sales and use tax rates are often the same, they can be different. Some local jurisdictions don’t levy a local use tax, while in others the rate is different than the sales tax rate. Missouri is one state where local use tax may differ from local sales tax.
Avalara Consumer Use Tax helps businesses comply with every step of the consumer use tax self-assessment process, from determining rules to remittance and documentation.
Seller use tax
Seller use tax (aka retailer use tax, vendor use tax, or merchant use tax) has more in common with sales tax than consumer use tax, and is often referred to as sales tax.
Seller use tax applies when a remote vendor makes a sale to a customer in a state where it has nexus. Put more simply, if your business has a physical presence in a state, you’re generally required to collect sales tax; if you’re a remote seller with economic nexus in a state, you’re probably required to collect seller use tax in that state.
A lot more seller use tax is being collected today than in the past as a result of the U.S. Supreme Court' s ruling in South Dakota v. Wayfair, Inc. (June 2018), which frees states to impose a sales tax collection obligation on remote sellers. More than 43 states have adopted economic nexus laws since the court’s decision. In fact, only two states with a general sales tax don't enforce economic nexus: Florida and Missouri.
A use tax by any other name...
Confusingly, some states refer to both consumer use tax and seller use tax simply as “use tax.” When talking about a remote seller’s obligation to collect tax, some state tax authorities use the term “sales tax.” This is likely because “seller use tax” is more of a court-created concept than a state-created concept.
Still, nomenclature matters. It’s essential you know where you have an obligation to collect and remit sales tax, consumer use tax, and seller use tax, and that you’re properly registered to do so.
Avalara Licensing can help you get registered in any or all states and local jurisdictions. Once you’re registered, Avalara AvaTax can help you streamline sales and use tax compliance. Avalara Consumer Use Tax integrates with Avalara Avalata to automatically calculate consumer use tax based on the nost current rates and rules.
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