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Will's Whiteboard: Do You Owe Consumer Use Tax?

Consumer use tax laws impact a huge number of businesses, yet many face penalties from state audit departments because they don't understand their use tax requirements. In fact, California reports that of the California taxpayers audited in 2012, one in six had committed use tax errors.

Do you know when your business owes consumer use tax?

In this episode of Will's Whiteboard, Will simplifies the concept of when businesses and consumers are liable to remit consumer use tax vs. sales tax. Watch to find when your business might have a consumer use tax liability.

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Note: this video only pertains to consumer use tax. Sellers can also be liable for "seller's use tax" -- but that's a topic for another day and another video.

Video Transcription

Hi. Welcome to Will's Whiteboard, I'm Will. Today we're going to be talking about consumer use tax. In every transaction there are three parties; there's the seller, there's the buyer, and then there's the Government. And for most transactions, the Government gets a little bit of money -- that's tax, right? Most of us are familiar with how sales tax works. But there are fewer people who are familiar with use tax. That's what we're going to talk about today, because a lot of businesses get use tax wrong. In fact, California found that for the 2011-2012 fiscal year, the number one sales tax error of those audited was consumer use tax. Let's look at how it works.

So, you have a transaction where the seller is selling a product to a buyer, and the buyer is giving money back to the seller. In a lot of cases, the seller is going to collect sales tax and they'll remit that directly to the State Government in question. Sometimes though, there's a taxable sale, and the seller doesn't collect sales tax. And in that case, the buyer or the user remits it to the Government, and it's called use tax. So again, when the user remits it, it's use tax. And when the seller remits it, it's sales tax.

Now, let's talk about a couple of different scenarios where use tax is common. One scenario; you've got an out of State seller that doesn't have an obligation to collect sales tax in that State, but there's a taxable transaction that occurs. In this case, the buyer owes use tax to the Government. Another scenario; there's a buyer that purchases a product without paying sales tax, and they put it in their resale inventory. And then later on, they take it out of their inventory and use it themselves, essentially becoming their own customer. In that case, they're the user and again, they owe use tax. So, this is how consumer use tax works and it's an important thing to pay attention to so you don't get dinged in an audit. Thanks very much. I'll see you next time.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Will Frei
Avalara Author Will Frei
Will Frei directs social media and blogging for @avalara. He is on a mission to help make sales tax less taxing for businesses of all kinds.